Economy and Environment: A Theoretical Essay on the Interdependence of Economic and Environmental Systems

Abstract

Environmental external effects are evidence of the inability of market prices to reflect the interdependence of economic activities undertaken within a common environment. They are an essential - not a peripheral - feature of all market economics. This essay shows how external effects are produced by the interaction of the economy with its environment, using a classical mass-balance model. No matter how efficient the market may seem to be, the use of market prices to determine depletion and pollution decisions creates more problems than it solves. Far from sharing the stable or relatively stable equilibrium properties of most economic models, the market economy is shown to be forced by its environment through a seemingly chaotic sequence of states. Reliance on the market to accommodate each change of direction merely exaggerates the general instability of the system. The 'market solution' to environmental problems is shown to generate only increasing uncertainty, a progressive myopia, and a heightened risk of conflict.