POLLUTION AND ECONOMIC GROWTH

If we are concerned with economic growth, we must carefully consider how pollution may affect growth. Can we quantify a critical amount of pollution that will be detrimental if no corrective measures are taken?

In many cases, environmental problems are the unintentional consequences of buying and selling goods. This typically occurs when these consequences are not captured in the price of the goods exchanged. Whenever the full cost of one’s behavior is not captured by a price by which an environmental trade-off can be valued, a negative externality or commons problem exists. ( see my public choice article- Our commons, Our Choice).

In many cases, without private property rights or markets to establish prices, economists must rely on evidence from the sciences in order to approximate the value of an externality. They may use this evidence to model the biological consequences of different policy options and the relevant costs and benefits. They use these models to approximate the dollar amount of a negative externality and attempt to tax or structure a system of property rights in such a way that the externality may be internalized. ( see the previous Public Choice post on the ‘Coase Theorem’) When this is done, and individuals are paying the full cost of their behavior which may be causing damage to the environment, an optimal solution may be achieved.

It is in this way that we capture both the positive and negative effects of economic growth for long term sustainability.