A lot of people blame 'market failure' for environmental problems like pollution or over-fishing. More often, though, it's political failure that causes the problems, by preventing markets from even existing. Like in water. As I explain in my new book, The Best Book on the Market:

In the dry western states of the US, the 'prior appropriation' rule meant that those who first started to extract water from a stream long ago got priority over those coming later. That prompted people to extract water they didn't need just to keep this right active. Other rules that water should go to 'beneficial use' meant that water for fish, wildlife and other public purposes came particularly scarce.

The solution, which took hold in the 1990s, is less regulation and more market, with people able to buy and sell rights to extract water. Then it is treated just like any other valuable resource conserved and nurtured precisely because it's no longer 'free'.

Africa has had similar experience in preserving wildlife, like elephants.

The obvious policy punishing anyone caught killing them does not work. Villagers will risk it, rather than see their harvest trampled underfoot. But the market has a solution: make the very rarity of these animals the basis for a business. Now, in game lodges across southern Africa, visitors pay handsomely to hunt (or just to watch and photograph) rare animals. So now, the local villagers see elephants as a source of income, not a pest: they dig water holes for them and use electric fences, rather than bullets, to protect their crops. This market-driven policy has led to a revival in many species that were once seriously threatened.

Over-fishing is another of those 'tragedy of the commons' problems where markets just aren't given a chance. Except in some places. For example:

Scotland is world famous for its salmon streams. That's because the rights to fish every inch of every river in Scotland are privately owned. The owners make a good business of issuing fishing permits to anglers, and so have a strong incentive to keep the rivers clean and well stocked. These valuable rights are jealously guarded: poaching is not considered quite as bad as high treason, but it's close. The result is that Scotland's salmon rivers are well maintained and not over-fished. The market nurtures the environment.

There are plenty of other examples. Tradable fishing permits are now helping to conserve fish stocks around Iceland. Tradable pollution permits are helping to limit emissions in part of the United States and Europe. Road pricing has reduced traffic congestion in London, Oslo, and other cities. Sure, none of these arrangements is perfect there is still too much politics, and too little market principles, in their design. But before we simply dismiss 'market failure', we should at least give markets a chance.

I hope my book will encourage our legislators to do just that. I've written like Freakonomics or The Undercover Economist in simple, personal, anecdotal terms that even politicians should be able to understand. It explains the power of markets, and the enormous care you have to take to preserve them. And, as in the examples above, how they can quickly and effectively solve problems that governments have struggled and failed to solve for years.

Eamonn Butler, Director,
Adam Smith Institute

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