Sunday, January 13, 2013

Markets and the Environment Chapter 4: The Efficiency of Markets

I purchased the book, but I won't be getting it in time to read this chapter.  Fortunately, the majority of it is again available for viewing online, this time with Google Preview.

In an ideal scenario, the market would take care of environmental issues.  There are some on the right who say that if the environment were a concern at all, the free market would take care of it.  There are some idealistic individuals (like Armory Lovins) who say that companies would boost profits by growing green.  Clearly this is not always the case.  Unfortunately, there are many times where the most efficient outcome is not achieved--that is, marginal social cost is not equal to marginal social benefit.

I don't think I learned anything new in terminology, but it couldn't hurt to review that markets are an exchange  of goods, not an auction.  They are decentralized (unlike an auction) and not government-controlled.

The rest of the chapter just goes over basic supply/demand and consumer/producer surplus.  Some common environmental economics jargon: the demand is marginal benefit is the price consumers are willing-to-pay and supply is marginal cost is the price producers are willing-to-sell.

Recall the three necessary tenants for an efficient market: perfect competition (no ability to manipulate prices, marginal benefit equals marginal cost), perfect information (everything freely available for consumers to see), and the market must be complete (all costs and benefits accounted for).  I presume that we focus primarily on the last condition; problems arise when not all environmental costs are included in the price of goods.

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