ABSTRACT
The theory of externalities, presented in the previous chapter, provides us with a powerful example of market failure, in which unregulated markets fail to produce an efficient outcome. Our analysis of externalities started with a standard model of supply and demand, and we adjusted it to take into account external costs and benefits. But other instances of market failure do not fit into a standard market framework. For example, what if there is no market equilibrium, or even no market? This might be the case when social or environmental resources are not owned or ownership rights are not clear. In other cases, there may be a market equilibrium, but one that is highly distorted by a failure to reflect crucial costs or benefits of the resource in question. Some important examples are:
The oceans, which generally are not subject to private property rights and for the most part are not controlled by individual countries, except in coastal zones. The world’s oceans contain some of the most important planetary ecosystems. Healthy fisheries are a critical source of food for the world’s population, supplying an important source of protein for many lower-income people.
Many forested areas and wetlands are not privately owned. They may be considered national assets or may be managed by local communities, but in many cases there may be no clear management rules.
The earth’s atmosphere is crucial to all of us but is owned by nobody. Atmospheric functions include the carbon cycle that supports both plant and animal life, climate stabilization, and parts of the water cycle—all critical to planetary ecology. The issue of climate change has become particularly important in recent years, and is one that we will focus on later in this chapter.
Public parks, public beaches, river and lake fisheries, and many recreational areas are important aspects of social and economic life for which there is generally no established private market.
A slightly different kind of example is public airwaves, which are often available for use by private companies under rules set by government.
