We do not have to look outside the Austrian school to find the missing piece. As famously articulated in Friedrich Hayek’s 1945 essay on the use of knowledge in society, the price system, not tort law, is the best mechanism for facilitating economic coordination among large numbers of widely scattered actors. Hayek uses the market for tin as an example. Sellers expand supply when the price is higher than their estimated costs of production. Costs are determined by the prices at which workers and resource owners are willing to supply inputs to tin producers. Consumers buy more when the price is below the maximum they are willing to pay for an additional unit. Coordination occurs without the need for face-to-face negotiation or even the knowledge of who your customers are or why they want your product. The law and property rights are there as a backstop, but only as a last resort in cases of fraud or breach of contract.
In the same way, a price for the right to emit pollution—for the right to use the atmosphere for waste disposal, if you prefer—would promote coordination of the many interested parties. In the acid rain scenario discussed earlier, such a price would encourage abatement by signaling polluters that their emissions interfere with the competing plans of downwind property owners. It would provide an incentive to concentrate abatement where its costs were lowest. The price of pollution would be passed backward along the supply chain in a way that gave a competitive advantage to cleaner fuels. It would be passed forward to customers in a way that encouraged energy conservation.
- See more at: http://www.economonitor.com/dolanecon/2014/03/31/austrian-environmental-economics-air-pollution-as-a-coordination-problem/#sthash.Ih1WxRFF.dpuf
We do not have to look outside the Austrian school to find the missing piece. As famously articulated in Friedrich Hayek’s 1945 essay on the use of knowledge in society, the price system, not tort law, is the best mechanism for facilitating economic coordination among large numbers of widely scattered actors. Hayek uses the market for tin as an example. Sellers expand supply when the price is higher than their estimated costs of production. Costs are determined by the prices at which workers and resource owners are willing to supply inputs to tin producers. Consumers buy more when the price is below the maximum they are willing to pay for an additional unit. Coordination occurs without the need for face-to-face negotiation or even the knowledge of who your customers are or why they want your product. The law and property rights are there as a backstop, but only as a last resort in cases of fraud or breach of contract.
In the same way, a price for the right to emit pollution—for the right to use the atmosphere for waste disposal, if you prefer—would promote coordination of the many interested parties. In the acid rain scenario discussed earlier, such a price would encourage abatement by signaling polluters that their emissions interfere with the competing plans of downwind property owners. It would provide an incentive to concentrate abatement where its costs were lowest. The price of pollution would be passed backward along the supply chain in a way that gave a competitive advantage to cleaner fuels. It would be passed forward to customers in a way that encouraged energy conservation.
- See more at: http://www.economonitor.com/dolanecon/2014/03/31/austrian-environmental-economics-air-pollution-as-a-coordination-problem/#sthash.Ih1WxRFF.dpuf
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