International Environmental Problems: A Primer
One of the main virtues of the market system is that it allows people and firms to exchange goods at a relatively low cost by relying on a series of decentralized markets. The presence of these markets enables people to improve their welfare by exchanging the goods that they produce for goods that they can use and value more highly. The theory of international trade shows that the same principle is at work when countries engage in free trade: by specializing in the production of various goods in which they may enjoy either a comparative advantage or absolute advantage they are able to realize greater gains from trading goods with one another than simply consuming the goods themselves. At the same time, many of the environmental problems we observe arise from some form of market failure. While markets may be efficient ways of distributing goods, they may not necessarily lead to optimal outcomes if the price of goods does not include all of the environmental costs associated with their production or consumption. One of the main ways in which all of the costs may not be included and markets might fail is when the rights to a resource are not well defmed. Rights might not exist in the case of open-access or common-pool resources, where no one party owns the resource and the resource is free to be exploited by all, such as fisheries on the open sea. In this case, the price of the fish might not take into...
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