Let Capitalism Take Care of the Environment

by Kenji Hosokawa | 6/21/96 5:00am

Economists say that a government should intervene in its country's production only if there is a manifest market failure. The miserable state of strict environmental regulation in the world evinces how insightful their claim is.

Environmental destruction is a negative externality -- the cost of production that price discovery triggered by market forces fails to incorporate. If a certain company sells a good whose production involves air pollution, ideally its market value would include the cost of pollution caused by the decline in the quality of life. Obviously due to the difficulty of its calculation, such an intangible social cost frequently cannot be reflected in the market price and thus results in a negative externality.

For years, policy-makers--falsely and presumptuously believing that they could calculate this social cost--have relied on regulation to force producers to accept arbitrary prices and quantities of their goods and services, as well as inflexible production schedules. They did not realize that the better solution was, as exhibited by the increasing number of successful cases, to create appropriate markets that would induce producers to internalize the cost of environmental destruction.

Take a look at the stark contrasts in the results of antithetical wildlife-conservation policies followed by the contries of Eastern Africa and Southern Africa. While Eastern Africa since the 1970s endorsed heavy regulation by almost completely banning hunting and nationalizing their game, Southern Africa granted private ownership of wildlife and permitted trade involving it. The policy implemented in Southern Africa allowed the private sector to internalize the social cost of wildlife destruction, but the East African policy gave bureaucrats the same responsibility.

As a consequence, the number of elephants in Kenya, for example, which banned poaching of various animals including elephants 20 years ago, has fallen from 65,000 in 1980 to 25,000. With automatic weapons widely available and the demand for rhino horn persistently high, governments simply cannot overcome the profit-driven poachers.

Heavy regulation also has come with a tremendous sacrifice on the part of the region's inhabitants. The policy, which often includes purchasing of land for wildlife, forces people to live near dangerous animals, such as hippopotamuses, known to eat human children, or elephants, which from time to time rampage through villages.

Southern Africa, on the other hand, has been witnessing an exciting trend. Zimbabwe, for instance, has experienced a surge in the number of elephants from 30,000 in 1980 to 74,500 today after privatizing wildlife. Liberalization has worked so well in controlling wildlife population that numerous East African countries, following their counterparts, are now about to legalize hunting.

Unfortunately most policy-makers, particularly those in the West, still do not appreciate the beauty of the market forces contributing to environment conservation. The "superfund" law of the United States, for example, which makes companies unnecessarily vulnerable to lawsuits if they do not meet the federally enforced, absurd level of toxic waste on their property, has only left environmentally unsafe land abandoned, for companies fear being held responsible for past owners' liabilities.

The success stories of regulation hardly involve the government's arbitrary setting of production levels guided by its inflexible time schedules. The drastic decline in sulfur emission after the Clean Air Act amendments of 1990 proves the point. In this case the U.S. government set a long-term deadline by which companies must attain a certain level of emissions, and auctioned off to polluters rights to emit sulfur dioxide.

This scheme gave polluters incentives to curtail sulfur emission rapidly, so that they could eventually sell those rights to other companies or the government at high prices when they are no longer needed. As a result the polluters required to reduce pollution today have already attained emission levels 40 percent below what the law requires.

The similarity between the encouraging news in Zimbabwe and the U.S. should then be clear. The key to environment conservation is the creation of appropriate markets that internalize the cost of production in the private sector which would otherwise become a negative externality.

Nonetheless, it seems the Democrats have won the battle of environmental regulation against the Republicans by branding them as extremists who care nothing about the environment, despite their sound argument based on economic theory and evidence. Although I must admit that certain aspects of the Republican plan are precarious, I feel that the Republicans do not deserve today's typical harsh criticism of them. Rather, one ought to look at the plan as a small step toward the establishment of a more effective and cost-efficient policy for the health of our precious Earth.

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