What is clean air worth? Is clean water good for the economy? Do parks, wetlands, beaches and coral reefs have real economic value?
These are important and timely questions to consider as politicians and policymakers debate the merits of environmental protection. Arguments for scaling back environmental regulations often include suggestions that environmental protection limits “free” market forces, increases costs to businesses, results in less economic activity and causes the economy to preform worse than it would if such regulations were absent.
Underlying this argument is an assumption that there will be more profits, more jobs and lower prices without environmental regulations. The purpose of this post is to provide an alternative perspective. Environmental protection often creates real economic benefits that can improve our lives and make our economy stronger.
As an economics professor in the Cameron School of Business at UNCW, part of my job is to teach students about the power of markets. We know markets do many things very well. Markets allow each of us to focus on what we are good at doing, which enhances overall productivity and allows us the time and freedom to enjoy leisure. By trading with each other we can have: comfortable homes; safe transport; clothes to keep us warm and fashionable; access to goods and services from all over the world; the ability to instantly communicate with people across the planet; and access to countless forms of entertainment.
Why do markets work so well to provide things we value? Because people (as all living things) are adapted to look after themselves and advance their own interests. When combined over millions of individuals, the incentives created by self-interest guide markets to provide mutually beneficial outcomes, a la Adam Smith’s invisible hand. We become collectively better off when we voluntarily trade with each other. Markets and trade improve our lives.
But there are other sources of value, and there are many valuable goods and services that “free” markets do not provide. For example, we derive real value from many goods and services provided by the natural environment but if left alone, “free” markets will not provide us with the optimal amount of parks, green space, wetlands, clean air or clean water.