Knowledge and the Environment:
Markets with Privately Produced
What do environmental emissions have in common with knowledge? This chapter sees both as privately produced public goods1 and gives conditions for efficient allocation of resources in economies with such goods. These conditions are independent of the units of measurement and extend those of Lindahl, Bowen, and Samuelson for standard public goods. The motivation is to understand efficiency in markets in which new types of items such as knowledge and environmental assets are traded along with standard private goods. Both are public goods in that they are not rival in consumption. However, they are privately produced and thus differ from classical public goods that are produced by governments.
Following Chichilnisky, Heal, and Starrett , we consider competitive markets, in which every trader faces the same price for each good. The institutional structure for trading public goods contemplated here is similar to that of the emissions markets for sulfur dioxide (SO2) that are traded in the Chicago Board of Trade since 1993. The example of global emissions markets is especially interesting. These were created recently by Article 17 of the Kyoto Protocol, where 166 nations explicitly agreed on the creation of such tradable rights among Annex B countries, which are mostly industrial nations (see chapters 11, 12, and 14 of this volume, and the Appendix). These markets were____________________