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Market-Based Solutions to Environmental Problems

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We have seen that markets can fail and even vociferous supporters of market environmentalism admit the necessity of some form of regulatory guidance of the economy. Nevertheless, a range of market-based policy solutions have been introduced in recent years to solve countless environmental problems. These each, in some way, for better or for worse, use the concepts of incentives, ownership, pricing, and trading to address environmental problems (Table 3.1).

Table 3.1 Market-based solutions. An overview of some dominant environmental regulatory mechanisms that involve market components and are based in part on market logics. Note that in all cases the state remains an important player in making markets work and achieving environmental goals

Regulatory mechanism Concept Market component Role of the state
Green taxes Individuals or firms participate in “greener” behavior by avoiding more costly “brown” alternatives Incentivized behavior Sets and collects taxes
Cap and trade Total amount of pollutant or other “bad” is limited and tradable rights to pollute are distributed to polluters Rewarding efficiency Sets limits and enforces contracts
Green consumption Individual consumers choose goods or services based on their certified environmental impacts, typically paying more for more benign commodities Willingness to pay Oversees and authenticates claims of producers and sellers
Environment and Society

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