Market Innovation and the Global Environment

Chichilnisky, Graciela

Markets are often considered enemies of the environment. A traditional view is that environmental issues are grounded on market externalities because, in cases such as smoking, one individual's consumption is irrevocably linked to those of others. This leads to ill defined private choices and to the failure of market efficiency. Markets can therefore induce overconsumption of environmental resources, such as clean air. Reciprocally, environmental concerns are often blamed for undermining market performance. Environmental regulation can lead to undue costs and prevent the unfettered behavior needed for achieving market efficiency. Yet recent evidence points in the opposite direction. Markets have evolved some of the most innovative and useful solutions for global environment problems. This includes new and profitable products such as catalytic converters, industrial scrubbers and waste management technologies, as well as new financial instruments such as tradeable emission permits, profit - sharing environmental ventures, and debt for nature swaps. One observes a groundswell of positive interest in the environment arising from all levels of the business community. This paper examines the role of market innovation in explaining the apparent contradiction between markets and the environment. It argues that market innovation can serve as a powerful tool of environmental policy operating together with a competitive market environment.



More About This Work

Academic Units
Department of Economics, Columbia University
Department of Economics Discussion Papers, 619
Published Here
February 17, 2011


August 1992.