Markets and Environmentalism – A Call for Better Incentives

Earlier I wrote that climate change and environmental concerns seemed to be too large of a problem to be left to nudges. Toward the end of Nudge, Cass Sunstein and Richard Thaler acknowledge the reality that nudges alone cannot tackle climate change, but they still encourage actions that follow the spirit of nudges, or at least learn from the psychology that makes nudges effective. Incentives play a huge role in behavior, and  need to be considered when governments approach businesses in an effort to redress the harms of climate change. Markets and environmentalism cannot be separated if we are to have a sustainable climate. Better incentives need to be implemented within markets to adjust for environmental needs.

 

The authors acknowledge market failures related to climate change by writing, “when the air or the water is too dirty, the standard analysis says that it is because polluters impose externalities (that is, harms) on those who breath or drink. Even libertarians tend to agree that when externalities are present, markets alone do not achieve the best outcome.” Pollutants are common externalities, as are traffic congestion and decimated wildlife populations. The cost of negative externalities is squarely on the shoulders of the individuals in the market, either the consumer or the producer. Governments are necessary to deal with these externalities and prevent them from harming innocent bystanders.

 

Additionally, regarding market failures and climate change, the authors continue, “When people are not in a position to make voluntary agreements, most libertarians tend to agree that government might have to intervene.” Most libertarians agree that labor contracts should be voluntary, with an employer reserving the right to hire anyone, and laborers reserving the right to walk away if their wages or working conditions are unfair. In reality, many people would starve if they walked away from a job, or at least face serious challenges, so voluntary agreements are not always possible. Within the climate change arena, many people cannot simply chose to travel to work by more fuel efficient methods, many people cannot afford the switch to solar power, and many other potential solutions are similarly unavailable, meaning people and businesses are often stuck, involuntarily, with polluting norms for travel, work, and heating or cooling their homes and offices. Markets alone don’t provide the impetus to change the status quo to reflect the reality of climate change.

 

The next post will dive deeper into the incentives and solutions to these problems, but it is clear that markets alone will not direct society toward a climate change solution. The danger of climate change is a long-term danger, where the costs are not experienced in the immediate moment but are instead experienced years and decades later. However, the costs of making adjustments to limit climate change are experienced up front. Upgrading infrastructure, investing in electric and solar technology, and living in more economically friendly ways present immediate costs that nudges cannot overcome. Nevertheless, we can consider the ways in which nudges work and build on those principles to begin to make changes. We can start to better align incentives to limit externalities, and we can preserve choice structures as we move forward with investments and innovation to help us meet the needs of the climate crisis. Government will play a big role and can learns a lot from the psychology of nudges to help address the challenges we face.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.