Free market forces are the most efficient and effective internalize externalities, but doing via price is not. So, since we do agree on this point of the free market forces, let's delve a little into what is a free market. A free market consist of the following: Free exchange, Free Entry, Free Exit, and Property Rights.
1) Free exchange. Individuals are allowed to exchange goods and services freely. There is no restriction on trade.
2) Free entry means that any individual can enter a market place to exchange goods. There are no legal restrictions on monopolies or regulations restricting competition.
3) Free exit means that any individual can leave a market place. There would be no bailouts or subsidies.
4) Property Rights. This is the most important. Property rights means that people's property is protected. Stealing a persons property is not legal. Invading a persons property is not legal. Or any other act of coercion is not legal. There are also repercussions for violation. Property rights are needed for a free market to work, and inherent in the structure in a free market.
Property Rights have been the most neglated. In the paper Environmentalism and Economic Freedom, by Economist Walter Block, published in the Journal of Business Ethics. He suggests that the reason we have such environmental degradation is because of the lack of property rights. Since the dawn of this country in 1776 until the 1840's, property rights of individuals were protected. If an industrial plant with a smoke stack went up by a home, and the smoke invaded the home, the owner of that home was able to sue and stop the invasion of externalities to their property. They did this NOT by pricing externalities, but by protecting property rights. But that all changed in 1840's and 1850's. Property rights were no longer upheld. Industry was protected. A little old home owner could no longer sue the smoke stack. Property rights of the individual were repressed. Why was this? The rational was because it was for the "public good".
Pricing externalities is not needed. What is needed, is the protection of property rights, not the protection of industry. What is needed is going back to the tradition of protecting our environment by protecting our property rights.
Also Inherent in Free Markets is that it has all available information. It's the Individuals that do not have all available Information. Nobel Prize Winner F.A. Hayek spoke on The Pretense of Knowledge. No one person knows everything, but through the market process information is revealed. Part of that process is price.
Impossibility of Pricing Externalities
Pricing externalities is not only NOT needed, and it's also IMPOSSIBLE. It's impossible because of the subjective theory of value.
From Ron Roman Lecture on business, government and civil society:
"Business encompasses a broad range of actions, institutions, and operations, the purpose of which is to provide products and services that create perceived value by satisfying human needs and thereby earn a profit."
Since the time of Adam Smith, and the Wealth of Nations, the idea of where value comes from has been debated? Is value derived from all the labor and cost associated with making a product also known as the labor theory of value? Or is it derived with respect to the individual, the subjective theory of value. Over and over again, the labor theory of value has been demolished, by free market and interventionist alike:
Free Market Economist:
Ludwig von Mises, Human Action
Murry Rothbard, Man, Economy, State
George Reisman, Capitalism
Milton Friedman, Pricing Theory
Murry Rothbard, Man, Economy, State
George Reisman, Capitalism
Milton Friedman, Pricing Theory
Interventionist Economist:
John Maynard Keynes, The General Theory
Subjective value is with respect to each of our individual valuations. Price is imputed from this subjective valuation. There is no way to objectify price.
I know all of us attempt to buy things created in a sustainable manner, perhaps even fair trade, organic, etc.... In a way that has little impact on the planet. It is because each of us has our subjective evaluation aligned. We care about the environment. We care about impact. We may go out of our way. But, there is a certain segment of the population that do not share the same belief we do. Their subjective valuations value other things more than the environment. They simply do not care. I have encountered some in non-global warming believing circles that will go out of there to avoid fair trade and other socially responsible products, because they don't find any value in it, regardless if it costs more or less. It is impossible to price externalities because of subjective valuation.
It is impossible to price the cost of not only externalities, but price the cost of anything. Just because something cost price X doesn't mean it will sell for price X. To illustrate this point, take a look at the housing market. During the bubble, housing prices soared. In the tract home were I lived, a house that cost 200,000 to build, sold for 300,000 thousand one month, 350,000 a few months later, and 400,000 a few months later. Today that same house is price 150,000. That is 50,000 less than the cost to actually build it of 200,000. Just because something is cost X to make, does not mean it will sell for price X. If we can't even price the cost of a house without externalities, how in the world can we price the cost of externalities?
In order to internalize externalities, all we need to do is return to the tradition of protecting the property rights of the individual. By doing so, our environment will be protected.
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This work is based from my talking points talking the con position the debate on pricing externalities to include all social and environmental costs. It has been edited for clarity.
