BE OUR GUEST: MARKET FORCES CAN BE POWERFUL ALLY TO HEALTHY ENVIRONMENT

Bill Weber is a professor of economics at Southeast Missouri State University.

In a recent issue of Fortune magazine author Daniel Seligman writes that "Rule No.1 in thinking about environmental problems is that there are no `solutions', only tradeoffs. We want a maximum of economic growth and a minimum of environmental damage. Some environmentalists would argue that economic growth is the major problem facing the environment.

These environmentalists would do well to recognize that society's demands for environmental amenities are directly related to income. As incomes increase, more people have wants and needs such as adequate health care, good schools, safe streets and neighborhoods, and housing satisfied and are willing and able to devote a greater share of their income to preserving and enhancing the environment.

In choosing how to evaluate the tradeoffs between preserving the environment and maximizing growth, society has basically two institutions to choose from. One is government command and control through regulation and public ownership. The second is market allocation relying on private property rights and the price system. The 1991 Nobel Prize winner in Economics, Ronald Coase, pointed out that there are transaction costs with either type of institutional arrangement.

When private markets are used to allocate resources, transaction costs include the costs of defining private property rights, enforcing contracts, establishing a system of money ~through which payments can be made, and the information costs to buyers and sellers of determining the value and quality of the resources that they own or seek to purchase. When natural resources are owned privately, the owner has the incentive to use that resource in its highest and best use. The best use of the resource when property rights are in force is determined by the highest bidder.

When government allocates resources, transaction costs include the cost of determining the value of resources in alternative uses without price signals, implementing tax collection systems, and establishing incentives for good resource stewardship. With government ownership of natural resources many groups vie for the use of the resources, often making lofty claims that the values they espouse, whether it is saving the spotted owl or saving loggers' jobs, are without reproach.

Private market failure is often attributed to private decision makers not accounting for the costs and benefits of their actions on third parties not involved in the trade. These third party effects are known as externalities and often occur because private property rights are not well defined over some resource. When externalities occur, government often steps in to try and correct for the misallocation of resources. Government can also fail to allocate resources efficiently for environmental amenities.

The 1992 Nobel Prize winner in Economics, Gary Becker, staked his claim to fame by arguing that all individuals are self interested and choose actions where the benefits outweigh the costs of their actions. Since managers in the public sector cannot claim profits from their actions, they often pursue other goals such as maximizing agency budgets or agency employment because these goals lead to greater prestige and salaries.

The U.S. Forest Service is the largest natural resource agency in the federal government. Their charge is in managing the National Forests for multiple use. To expect the managers of the Forest Service to ignore information and incentives in their own self interest and act for the common good requires a heroic leap of faith. Even though recreational uses of the National Forests enjoy a high value from the public, the Forest Service reaps most of its revenues from timber sales.

While free markets and the environment may seem unlikely bedfellows, the opportunity exists for the two to coexist and prosper. The notion of free market environmentalism should not be thought of as a final solution but as a process of evaluating tradeoffs that exist between alternative uses of a resource accounting for the incentives that economic agents have. The foundation of free market environmentalism is private property rights and self-interest. Private property rights are not a static, defined once and for all institution, but are continually evolving.

By tying good stewardship of resources to wealth or income, markets generate many individual experiments with successful ones copied. The process of linking markets and environmental amenities recognizes that information on the best use of resources tends to be diffuse, rather than concentrated.

The Nature Conservancy has quietly become one of the largest private landowners in the United States by taking money that would normally go to lobbying efforts and directly buying land to preserve various plant and animal species. By trading parcels of ~~land with less diversity or fewer threatened species for parcels with greater diversity, the Nature Conservancy is able to enhance their land values. Increasing wealth allows the Conservancy to preserve even greater numbers of plants and animals and add to their land holdings. The International Paper Company is a large private landowner of forests in the South. Since individuals are willing to pay to use their lands for hiking, hunting, and fishing, the company has found it in their own self-interest to take those alternative (and often lucrative) uses into account. The Nature Conservancy and the International Paper Company are just two out of many success stories of markets enhancing environmental amenities.

Across the country, environmental groups are heralding in the arrival of Bill Clinton and Al Gore as the dawn of a new environmental age. Still, they may find their slice of pie too small for their appetites, as education, health care, infrastructure, and deficit reduction each have healthy appetites of their own. If truly concerned about the environment, these groups should consider devoting fewer resources toward lobbying and more resources toward the search for market based solutions.

Imagination will be required in establishing private property rights and proper incentives, but once in place, market forces should prove to be powerful allies to a healthy environment.