British Academy: The UK's National Academy for the Humanities and Social Sciences

Partha Dasgupta: 'The Economics of the Environment'
Copyright © The British Academy, 1996
Printed in Proceedings of the British Academy, Volume 90, pp. 165-221

4. Markets and their Failure: Unidirectional Interactions

Since we economists understand market competition better than we do political competition, we understand market failure better than we do government failure. In fact, ecological economics has provided us with much insight into the nature of those allocation failures that arise from malfunctioning markets. In this and the next section, we will study this.

Market failure is prominent in those hidden interactions that are unidirectional; for example deforestation in the uplands, which can inflict damages on the lowlands in watersheds. It pays first to concentrate on the assignment of property rights before seeking remedies. The common law in many poor countries, if we are permitted to use this expression in a universal context, de facto recognises polluters' rights, not those of the pollutees. So, then, let us consider first the case where the law recognises polluters' rights. Translated into our present example, this means that the timber merchant who has obtained a concession in the upland forest is under no obligation to compensate farmers in the lowlands. If the farmers wish to reduce the risk of heightened floods, they will have to compensate the timber merchant for reducing the rate of deforestation. Stated this way, the matter does look morally bizarre, but that is how things would be with polluters' rights. Had property rights been the other way round, that is, one of pollutees' rights, the boots would have been on the other set of feet, and it would have been the timber merchant who would have had to pay compensation to the farmers for the right to inflict the damages that go with deforestation. However, even if the law were to see the matter in this light, there would be enforcement problems. When the cause of damages is hundreds of miles away, when the timber concession has been awarded to public land by the government, and when the victims are thousands of impoverished farmers, the issue of a negotiated outcome doesn't usually arise. The private cost of logging being lower than its social cost (see below), we would expect excessive deforestation.

But when the market prices of environmental resources are lower than their social scarcity values, resource-based goods can be presumed to be underpriced in the market. [note 10 (go to Notes)] Naturally, the less roundabout, or less "distant", is the production of the final good from its resource base, the greater is this underpricing, in percentage terms. Put another way, the lower is the value-added to the resource, the larger is the extent of this underpricing of the final product. But this in turn means that if the country were to export primary products, there would be an implicit subsidy on these exports, possibly on a massive scale. Moreover, the subsidy would be paid not by the general public via taxation, but by some of the most disadvantaged members of society: the sharecropper, the small landholder or tenant farmer, the forest dweller, the fisherman, and so on. The subsidy would be hidden from public scrutiny; nobody would talk of it. But it would be there; it would be real. We should have estimates of such subsidies in poor countries. As of now, we have no estimate. [note 11]

In some parts of the world, community leaders, non-government organizations, and a free press (where they exist) have been known to galvanise activity on behalf of the relatively powerless "pollutees". In recent years this has happened on a number of occasions in different contexts. One of the most publicised was the Chipko Movement in India, which involved the threatened disenfranchisement of historical users of forest products. This was occasioned by the State's claiming its rights over what was stated to be "public property" and then embarking on a logging operation. The connection between environmental protection and civil and political rights is a close one. As a general rule, political and civil liberties are instrumentally powerful in protecting the environmental resource-base, at least when compared with the absence of such liberties in countries run by authoritarian regimes (Dasgupta, 1993).

More: 5, Markets and their Failure: Reciprocal Interactions and the Problem of the Commons
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