Are regulations really necessary to address environmental issues, or can they be addressed by the market? Nick Muller, a visiting professor at Carnegie Mellon, explains how environmental issues are addressed by the market – and how they’re not.

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Transcript

HOST: Do markets tend to solve environmental problems like pollution without government regulation? On this week’s Energy Bite, Nick Muller, a visiting professor at Carnegie Mellon University, has some answers.

MULLER: No, in most cases markets fail to appropriately deal with environmental issues like pollution. The consequences of emissions generated through the production or consumption of certain goods are not felt by buyers and sellers in market transactions for such goods. As a result, neither firms nor consumers have an incentive to take these impacts into consideration when making decisions.

HOST: Does that mean then that it falls to the government to guide the market?

MULLER: The role of government is to compel either firms or consumers to consider these costs when making their production or consumption decisions. Governments can (and have) done this through a variety of policy types: standards, taxes, or pollution allowances.

The connection between environmental policy and pollution impacts is most clear in the case of an emission tax. The correct emission tax should be set to equal the damage, or social cost, due to emissions of a particular pollutant. In most cases, this will raise the price of the good and reduce the amount produced and consumed.

HOST: Do you think there should be a tax on emissions? Take our poll, see the results, and ask your energy questions at Energy Bite dot org.

ANNOUNCER: Energy Bite is a co-production between 90.5 WESA and Carnegie Mellon’s’ Scott Institute for Energy Innovation.