Introduction
Central to environmental economics is the concept of market failure. Market failure means that markets fail to allocate resources efficiently. As stated by Hanly, Shogren and White (2007) in their textbook “Environmental Economics”, “A market failure occurs when the market doesn’t allocate scarce resources to generate the greatest social welfare. A wedge exists between what a private person does given market prices and while society might want him or her to do so to protect the environment. Such a wedge implies wastefulness or economic inefficiency; resources can be reallocated to make at least one person better off without making anyone else worse off”. Environmental degradation and market failure has been a burning problem now a day.
Environmental Degradation and Market Failure
Environmental Degradation and Market Failure
The general price system of market mechanism cannot determine the true value of environmental goods, which creates inefficiency leading to what we call market failure. Common source of market failure in case of environmental goods is the existence of their two characteristics- namely the “externality” and the “public good”.
Externality
An externality exists when a person makes a choice that affects other people in a way that is not accounted for in the market price.
An externality can be positive or negative, but environmental economics is usually associated with negative externality. A negative externality is a spillover of an economic transaction that negatively impacts a party that is not directly involved in the transaction. The first party bears no costs for their impact on society while the second party receives no benefits from being impacted. This occurs when marginal social cost is greater than marginal private cost (MSC > MPC). A firm emitting pollution will typically not take into account the costs that its pollution imposes on others. As a result, pollution may occur in excess of the socially efficient level, which is the level that would exist if the market was required to account for the pollution. Hence it is clear that – environmental degradation having a negative externality is not reflected in market transaction and so it creates market failure.
An externality can be positive or negative, but environmental economics is usually associated with negative externality. A negative externality is a spillover of an economic transaction that negatively impacts a party that is not directly involved in the transaction. The first party bears no costs for their impact on society while the second party receives no benefits from being impacted. This occurs when marginal social cost is greater than marginal private cost (MSC > MPC). A firm emitting pollution will typically not take into account the costs that its pollution imposes on others. As a result, pollution may occur in excess of the socially efficient level, which is the level that would exist if the market was required to account for the pollution. Hence it is clear that – environmental degradation having a negative externality is not reflected in market transaction and so it creates market failure.
Public Good
When it is too costly to exclude some people from access to an environmental resource, the resource is either called a common property resource or a public good. In either case of non-exclusion, market allocation is likely to be inefficient.
These challenges have long been recognized. Hardin’s (1968) concept of the “tragedy of the commons” popularized the challenges involved in non-exclusion and common property. “Commons” refers to the environmental assets itself, “common property resources” or “common pool resources refer to a property right regime that allows for some allocative body to devise schemes to exclude others, thereby allowing the capture of future benefit streams; and “open- access” implies no ownership in the sense that property everyone owns nobody owns.
The basic problem is that if people ignore the sacrifice value of the commons, they can end up expending too much effort, over harvesting a resource (e.g., a fishery). Hardin theorizes that in the absence of restrictions, users of an open-access resource will use it more than if they had to pay for it and had exclusive rights leading to environmental degradation. This environmental degradation characterized with negative externality again will lead to market failure.
These challenges have long been recognized. Hardin’s (1968) concept of the “tragedy of the commons” popularized the challenges involved in non-exclusion and common property. “Commons” refers to the environmental assets itself, “common property resources” or “common pool resources refer to a property right regime that allows for some allocative body to devise schemes to exclude others, thereby allowing the capture of future benefit streams; and “open- access” implies no ownership in the sense that property everyone owns nobody owns.
The basic problem is that if people ignore the sacrifice value of the commons, they can end up expending too much effort, over harvesting a resource (e.g., a fishery). Hardin theorizes that in the absence of restrictions, users of an open-access resource will use it more than if they had to pay for it and had exclusive rights leading to environmental degradation. This environmental degradation characterized with negative externality again will lead to market failure.
Evidence of Environmental-Degradation and Market Failure
The evidence of market failure as a result of environmental degradation is distinctly noticed in “Oil Town” Duliajan and its nearby areas. Oil India Limited, one of the “Navaratna”s indulging the mining and extraction of petroleum and natural gas headquarters at Duliajan. There are more than 50 oil wells and 10 OCSs (Oil Collecting Station) in Duliajan and the nearby areas, within 5 km radius of the town. Most of the inhabitants of the nearby area depend on agriculture as occupation and major source of income where the lion’s share is occupied by rice cultivation. A large number of pipes transporting crude-oil and natural gas have been fixed through the paddy fields. In nearby areas of Duliajan, including Bokuloni, Kathalguri, Bhadoi- Pasaali, Madhuting, Naoholia etc. this is an as usual scenery. Leakage of these pipes at a blink of eye fills the paddy fields with crude-oil which is a cheaply noticeable incident in this area. The OIL authority compensates the victims but it is insufficient to cover the real loss of the farmers as the productivity of soil has been gradually falling day by day. In this incident, environment degradation caused by the company is reducing the productivity of soil, the inhabitants have been the silent victims and their loss has not been priced by market mechanism which we term as market failure.
Another noticeable evidence is found in Kathalguri, a village -5 km away from Duliajan where OIL has planted an OCS. This station generates sounds of greater than 100 decibel (>100dB) 24 hours a day. One can even hear the sound from 1km away from the plant at night hours. The inhabitants residing near the OCS have been victims of noise pollution since the establishment of the plant. The sound is much more terrible during the night hours as for some inhabitants it has been a cause of sleeplessness and hearing problem. As the loss of the victims from the OCS cannot be termed in price system through market mechanism this is a distinct example of environment degradation in creation of market failure.
Another noticeable evidence is found in Kathalguri, a village -5 km away from Duliajan where OIL has planted an OCS. This station generates sounds of greater than 100 decibel (>100dB) 24 hours a day. One can even hear the sound from 1km away from the plant at night hours. The inhabitants residing near the OCS have been victims of noise pollution since the establishment of the plant. The sound is much more terrible during the night hours as for some inhabitants it has been a cause of sleeplessness and hearing problem. As the loss of the victims from the OCS cannot be termed in price system through market mechanism this is a distinct example of environment degradation in creation of market failure.
CONLUSION
Environment degradation began at the dawn of the civilization and since then human have been victim of this evil. Industrialization, the rush to development has brought immense luxury to our lives but we are thereby polluting our planet thus creating ourselves the victims of the same. Environmental degradation and market failure has become a cheaply noticeable incident now a day. To overcome this wicked phenomenon will surely be a big challenge for us as well as the future generation.
References
1. Hanly, N., J. Shogren, and B. White (2007). “Environmental Economics in Theory and Practice”, Palgrave, London. 2. Ostrome, E. 1990. “Governing the Commons.” Cambridge: Cambridge University Press. 3. http://en.wikipedia.org/page/Environmental_Economics.html “Environmental Economics” (Accessed on 12th September,2015) 4. http://publicecon.wikispaces.com/page/xml/Negative+Externalities+and+t he+Environment?v=rss_ “Negative Externality” (accessed on 12th September, 2015) 5. http://www.econlib.org/library/Topics/College/marketfailures.html “ “Market Failure” (Accessed on 12th September, 2105)
