Economic Mechanisms for Environmental Protection: Business versus Market Transaction Costs

Article excerpt


This study presents theoretical arguments and evidence that attempt to show the contribution of economic mechanisms typical of a business for resolving problems of environmental protection. Firstly, a brief synopsis is given of the classic solutions that environmental economics proposes for correcting environmental externalities. Next, the benefit of expanding these two mechanisms is discussed so that they include those intermediate mechanisms for which it is not possible to clearly establish if they are developed within the domain of the market or the business. The study's focus resides in the fact that the explicit expansion of the range of solutions proposed from a macroeconomic point of view establishes a connecting point between environmental economics and business economics, an area in which academic attention to environmental matters has been significantly less. (JEL D23, K32)


The first vestiges of environmental worry in economic thinking goes back to the start of the 1970s when environmental economics was formed as a specific area in general economics. The basic argument of environmental economics is found in the problem of externalities associated with the use of common property natural resources. Given that there is no meaningful price that represents the value of these resources, their conservation or improvement does not offer individual monetary rewards. Likewise, individual degradation actions or uncontrolled consumption are not penalized through the imposition of costs. The consequence is immediate: the particular economic decisions that affect that common property natural resources do not consider the impact (externality) caused to the rest of the co-owners.

Based on this argument, the solution proposed by environmental economics has the basic objective of defining the appropriate economic mechanisms for internalizing the externalities. In order to achieve this objective, two types of mechanisms have been proposed: the interventionist solution and the market solution. In general, environmental economists have reduced the core of their discipline to discussing the benefit of each one of these two mechanisms. Nevertheless, resolving the problem of environmental externalities must be completed by the efforts of business organizations. In the following pages, the authors will defend this argument according to the underlying hypothesis that business constitutes an alternative mechanism that, in certain circumstances, allows contributing to the internalization of environmental externalities at a comparatively lower cost.

Classic Economic Mechanisms for Correcting Environmental Externalities

Environmental economics is concerned with the relationship between economic activity and the surrounding economic framework developing according to the principles of sustainability. The most commonly accepted definition of sustainable development is established in the Brundtland Report by the World Commission on Environment and Development [1987, p. 8]. It is development that satisfies present needs without compromising the capacity of future generations to satisfy their own needs. To do so, it studies three basic areas: resolving the problem of externalities, optimizing inter-generational assignment of non-renewable resources, and valuation of non-market resources. For the purposes of the arguments shown in this study, the primary question is the first one. From this point of view, there are two approaches in the literature that propose solutions to the problem of externalities: the Pigovian approach and the Coasian approach.

Even though environmental economics was not considered a differentiated area of economics until the 1970s, the ingredients that served as a basis for establishing the two approaches date back much farther. Specifically, the Pigovian approach appears with the work The Economics of Welfare, published by Pigou in 1920. …