The Stern Review, written by economist Nicholas Stern for the British Government, conveys the affects of economic activity on the environment, corroborating that “climate change is a result of externality associate with greenhouse-gas (GHG) emissions, it entails costs that are not paid for by those who created the emissions…and threatens to be the greatest and widest-ranging market failure ever seen“. The release of GHGs emissions into the atmosphere causes global warming, which has severe impacts on the environment.
For example, warming instigate meltdown of glaciers cause sea levels to rise, resulting in heavier floods where millions of people become homeless and vulnerable to diseases, such as malaria and dengue fever. Droughts would be more intense, declining crop yields and production of sufficient foods, leading to deaths from malnutrition and heat stress. (Stern Review Report - The Internet) Gases produce acid rain, which can be carried a great distance, exhausting natural recourses, such as forests, soil, and rivers, causing deformation and extinction of fish and risking human health. (Acid Rain- The Internet)
Market economy also impact upon resources and services that are non-excludable, such as forests, water and air, known as public goods. This means that the consumption of air by one individual does not reduce the amount of air available for consumption by others; and no one can be excluded from using air. (Hinchliffe and Woodward, 2004, p.103) As economic agents base consumption on financial profits only, they have no incentive to preserve the environment voluntarily. As the usage of air is free, they take advantage by polluting the air with chemicals, which bear costs mainly to the Government by having to clean the emissions. This is called the free riding problem, which causes market failure since consumers can not be excluded or have to pay for the good or service. (Tutor2u -The Internet)
As many of our natural resources are becoming exhaustible, there are viable ways to control the market, which may limit the impact of market failure on public goods, such as green taxes enforcement and extending private ownership by granting property rights. For example, extending private ownership of seas would mean that the current external social costs of fishing would become private costs to the owner. This would give owners the incentives to reduce these costs by charging others to fish as well as regulating and preserving fish supply for the future, which may even eliminate externalities all together. (Hinchliffe and Woodward, 2004, p.101). However, inciting
private owners to consider all social costs and ensuring preservation of natural resources as intended may be difficult, as they can exploit their property rights and find other ways to increase profits. Privatising forests can lead owners to level their plot and build houses on it instead of limiting logging by charging for it and ensuring future income, which would reduce externalities caused by cutting down the forests, such as the levels of carbon dioxide. (Hinchliffe and Woodward, 2004, p.102)
Another approach is to impose green tax, which aims to make polluters pay the full social costs of their emissions. However, evaluating environmental damage and assessing the costs of pollution activity could be complex, considering the wider population and future generations. One way of doing so would be to ask people how much they are willing to pay to reduce pollution or how much they should be paid to tolerate it. However, this would create a division between rich and poor, where wealthy people would be able to pay or be paid more then poor people could or would, which would lead to polluters paying higher taxes for polluting areas where wealthy people live. As a result, firms would relocate their business in poorer countries where fewer environmental regulations are imposed, as they need the revenues such firms bring for their own economic growth. Consequently, global population is affected, as pollution can be carried from one country to another. (Hinchliffe and Woodward, 2004, p.107,108)
In conclusion, market economy is an economy in which the production, distribution and exchange is controlled by individuals and privately owned corporations who base their economic activities on profits only, which influenced by the pressures of competition. As a result, economic activity produces a vicious circle, causing environmental degradation by pollution, which causes global warming and climate change, resulting in social costs. In turn, climate change causes the decline of resources, such as crop yields and sufficient production of foods. Moreover, economic activity affects us all by the damage done to public goods and slowly making resources exhaustible. Two ways were suggested to try to control market activity, enforcing green tax and extending private ownership. However, to put these solutions into practice would be complicated and perhaps naive, as it would mean trusting economic agents to use resources as intended to preserve the environment. Furthermore, enforcing green taxes, creates inequality between rich and poor as well as driving businesses to locate in developing countries. As the current situation creates uncertainty of the existence of future generations there is a need for an immediate action and perhaps the way to go forward is to reconstruct market economy and turn it to be environment friendly.
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References
The natural and the social: uncertainty, risk, change by Steve Hinchliffe and Kath Woodward. The Open University, 2004,
Tutor2u -The Internet.-
What is acid rain - The Internet-
Stern Review Report - The Internet-