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Monday, November 26, 2007

Market Failure I - Global Warming

More bad news on the ice melting front, when an American Meteorological Society Panel disclosed that the Arctic and Greenland ice masses are melting faster than expected. Meanwhile oil hits $100 per barrel and the dirty energy economies of China and India boom forward. US production of greenhouse gases goes on unchecked.

Global warming and climate change are huge failures of the market. The market produces the fossil fuels and burns them in ever greater quantity in spite of the clear evidence that they are suffocating the planet. One can hardly say it is a failure of information.

In what ways has the market failed?

One. The market does not include the costs of human misery and planetary demise in the price of its products. This is a complete failure, because "the market" consists of nothing more than the incident of purchase and sale. Costs not captured in this moment are considered "externalities" and passed off to the public sector or to future generations or to those with too little power to resist.

For example, the price of a gallon of gasoline includes the costs of discovery, drilling, pumping, transporting, dispensing, and with the gas tax, building the roads upon which the gasoline is burned. Omitted are the costs of global warming as well as the not insignificant costs of geopolitical chaos, wars and sacrifice for "quote" national interests "unquote."

One could probably compute a total for the State and Defense Departments' efforts in this regard, and then triple it to account for the costs in human terms. But the costs of global warming cannot be accurately determined, because they will be extracted from those who cannot pay cash, and must pay with the pound of flesh or acre of innundated land or plot of parched and barren earth. Eventually "they" will include use all

Were global warming insurance required of gasoline purveyors, one could see the cost entering into the purchase-sale event. It might double. If an insurer could be found. At least one could say the market reflected the real world and the real world costs.

So, One, the market fails to account for all the costs. Or even half the costs. A modest market failure. But now, two.

The market does not produce because it cannot produce the public goods that are needed to address global warming. Its total product is in private goods, from candy bars to cars to houses to all the things our society produces in such abundance that are consumed by individuals or small groups. The market itself can only produce private goods because it, again, consists of the moment of purchase and sale and the product must have a purchaser who is identifiable, isolatable and who controls enough of the benefit to be willing to pay the price.

The market does not produce public goods at all unless the government collects its compulsory fees and contracts with private companies. The government thus creates the market for public goods.

Roads, schools, infrastructure of all types, national defense, courts and prisons. All necessary, but none created by the private market.

We can do this, as we've said in other posts, by regulation -- by strictly describing what can and cannot be sold, from toasters to tractors, in terms of carbon footprint.

Or government can create the market by directly contracting for, say, zero emission locomotives or buses or other government-purchased items. Private business can take a contract offer for a specific product, so long as it has a commitment to sale, and justify the R&D to innovate to the specifications. That is called making the market.

Will the private sector take it on itself, on spec, so to speak, to produce such a thing. No. A complete market failure to produce the innovation by itself. The government must create the market for the products and services that will get us off the carbon cross.

Notably, as far as I am aware, the efforts to massage the market with such things as carbon taxes and cap and trade efforts have had less success than they should be having. Leakage from the system seems to have devalued the carbon credits. It was a noble experiment, it should be refined and continued, but it has not produced the results we need, and there is no time for trusting the next version. Use it in addition to, but not instead of, direct government making of the market.

So two, the market will not spontaneously create the necessary technology. It needs the government to create the appropriate market or that market will never come into being.

Three. The market has completely failed to protect the Commons. The air, water, and ecosystems we all depend on are exploited mercilessly by market actors. Private property is sacrosanct, but the common property is without an entity or institution that will see its rights and the rights of the collective inhabitants of the planet are not trampled upon.

The examples are too numerous to mention. A system upon which the society depends to provide for its well-being must treat this common property with respect. That is not the so-called free market system.

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