March 1, 1999

Harnessing Markets to Improve Water Quality

Using a Free-Market Approach Can Save Money and Reduce Pollution
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In this age of environmental concern, talk about the failure of markets to provide environmental quality is common. Many people believe that while markets are good at providing things like cars, groceries, and CD players, they can't deliver when it comes to reducing pollution. In fact, some argue that markets are the real source of the problem--that pollution and free markets go hand-in-hand.

But this view is misplaced. Property rights and incentives are what cause the market to be effective in providing other goods, like food, cars and housing. Merchants own the goods on their shelves (through property rights) and get to keep the gains obtained when they please us, so they have incentives to do so. Similarly, the innovative auto producer who gains market share gets to keep some of the resulting profit. As consumers, we too have incentives to choose carefully, since we will become the owners of what we buy. The process works the other way as well. Merchants and producers who miss the mark when seeking our patronage must cover their costs or go out of business. And if we consumers goof when making choices, we suffer. Thus, property rights and incentives lead both buyers and sellers toward decisions that are satisfactory to both.

Can property rights and market incentives be harnessed to bring environmental goods, like water quality? The answer is yes.