I N C LU S I V E G R E E N G R O W T H: T H E PAT H WAY TO S U S TA I N A B L E D E V E LO PM E N T
BOX 2.1 Institutional and market failures that help explain why growth is often environmentally unsustainable Growth may be environmentally unsustainable because of institutional and policy failure. Institutions and governments may themselves face bad incentives, driven by political economy. Or they may lack information on the overall impact of the policies they promote. Subsidizing energy “to benefit the poor” is a classic example—the subsidy encourages energy consumption, thereby increasing emissions of local air pollutants that often disproportionately affect the health of the poor. Moreover, it is generally the nonpoor who benefit most from energy subsidies, because they can afford an energy-intensive lifestyle. Alternatively, market failures may be to blame. Under some technical assumptions, competitive markets are an efficient means of allocating goods. But real markets deviate from the ideal in a multitude of ways that can have severe consequences for the environment and social welfare. Examples include the following: • Externalities. These are uncompensated damages imposed by one economic agent on another. For example, a factory owner can maximize profits from production by releasing untreated effluents into a river rather than incurring the costs of treatment. But the resulting water pollution can damage the health of people drinking the water downstream. This health damage is external to the profit-maximizing decisions of the factory owner, with the result that the social benefits from production are less than private profits. • Public goods. Many environmental assets have a public-good nature—they provide services, such as amenities or the regulation of water flow, that
are nonrival (one person’s enjoyment of the amenity does not decrease another person’s enjoyment) and nonexcludable (there is no practical way to prevent people from enjoying an amenity such as a beautiful view). The result is that public goods are typically underprovided by private markets, because there is no way for private actors to appropriate all the benefits from providing the public good. • Information asymmetries and agency problems. If different agents have different information, environmental impacts can result. Factory owners typically have much more information about pollutants, treatment measures, and treatment costs than environmental regulators, which can reduce the effectiveness of regulation. Landlord-tenant relationships lead to a type of agency problem with regard to energy efficiency: If the landlord pays the energy bills, the tenant has no incentive to conserve energy; if the landlord owns the furnace but the tenant pays the energy bills, the landlord has no incentive to invest in a more efficient furnace. • Missing or incomplete property rights. For common pool resources (for example, a fishery or a shared aquifer), the lack of property rights (such as individual quotas) can lead to overexploitation and ultimately the collapse of the resource. From an economic perspective, overexploitation manifests itself as dissipation of resource rents: in the absence of quotas, exploitation efforts by users of the common pool drives up costs to the point at which economic profits drop to zero. Source: Sterner 2003.
littering behavior in the United States. So for psychologists, incentives also matter but they must be tailored to how people process information and react to it. Unfortunately, inappropriate incentives, or the lack of incentives, led to the current widespread inefficiency in the way natural resources are used. This chapter examines the range of tools that can be marshaled to increase effi ciency by changing behavior with respect to the environment
and natural resources—tools that aim to increase social welfare through greener growth. The tools fall into the following areas: • Incentivizing: providing effective market signals to spur green growth • Informing and nudging: using information and framing to influence economic actors • Imposing: using rules and regulations.
Published on May 23, 2012
Published on May 23, 2012
As the global population heads toward 9 billion by 2050, decisions made today will lock countries into growth patterns that may or may not b...