Open Future Image Discovering the Right Prices
Markets are not meant to solve social problems, the purpose of the market is to clear the floor. In that process prices are discovered, that are signals to participants. Market failures exacerbate poverty, disease, pollution, corruption, crime and inequality.

The Power of the Right Price

There is a printable version of this page here.

Price signals are very effective in encouraging people to buy or not to buy goods or services. Economic theory tells us that right prices are a very effective way to ensure resources are used wisely and that pollution and other "bad's" are avoided wherever possible. So how do we do that?

Contraction and Convergence

Composer and string musician, turned award-winning environmentalist, Aubrey Meyer proposes that we use a Video Link"contraction and convergence" model of global development to avoid dangerous climate change. In 1990 Mayer started the Global Commons Institute. He works from the ideal that each human being has equal rights, equal entitlement and equal responsibility. Mayer calls this concept the principle of "Equity and Survival".

Market Failures

The failure of markets to include the full cost of production and use, in the price people pay, is termed an externality by economists. Businesses try wherever possible to exteralise cost rather than internalise the cost. If a "free" place for waste disposal is available, that will be used and the cost of dumping is externalised. It's up to governments and communities to set market rules that force people to internalise these costs. Governments in particular are weak willed in this regard, trying to please their business sponsors. The emission of greenhouse gases and water pollution and overuse of land or resources, and the cost of recycling products, are examples of "bad's" that should have a price. In most cases only government can create a mechanism to sustain that price. There are many ways to arrive at "the right price", but the principle of the auction is usually used. How much is available? How much is demanded? At what price does supply equal demand?

Water Auction Proposal

There is a proposal, by John F. Raffensperger, to ration the scarce water under the Canterbury plains, in New Zealand, by an auction system. The first stage is to measure, and record accurately the water taken from each well. At the same time changes in the water table are recorded and analyzed. A decision must be made about how much resource will be reserved for nature, just to sustain the habitat. Then a political decision must be made to create a market and to set seasonal limits on how much water can be used. Farmers could be allocated water purchase rights. A farmer could choose to dry farm, and to sell their unused water rights to someone else. Within the model there are many options, and depending on where wells are located, the price of water at a particular time, might vary widely.

Governments Must Control Markets

Ship of short term foolsCorrecting market failure is especially important in developing countries. If governments can succeed in creating and enforcing the purchase of "rights' and if they can impose taxes on transport and electricity production using oil, gas or coal, the incentives to develop a "clean economy" is built into the pricing system from the beginning. This will help to empower people to make good choices for the future as well as for today. Over time farmers would get clear options about how to best use the available resource. This ensures the best possible outcome.

Stopping Growth

Economic growth is unsustainable on a finite planet. www link Gross Domestic Product is not a suitable measure of economic performance. We have to use measures of economic, environmental and social wellbeing together. www link Environmental and social wellbeing need to be discussed at the head table alongside and equal to economic considerations. If economic success can only occur by the destruction of the environment, something is wrong with the decision making process and the pricing structure. Governments usually get around this sort of problem by making subsidy payments. Generally that's a mistake, because is tends to become a permanent subsidy. Far better to tax a bad, so that people are encouraged to avoid that tax by choosing a "good".

Open Future™ values comments supplied by our readers. Add your voice here.