BUS604: Innovation and Sustainability

Externality problems often occur in market economies when property rights are not properly assigned. Environmental problems often arise because of a lack of well-defined and enforceable property rights. Climate change is a stark example of this because nobody "owns" the atmosphere and in turn, humans have been able to add greenhouse gases to it without cost. This is now causing rising global temperatures and instability in our climate system).

The challenge is to define property rights for shared resources, such as the natural environment, that are hard to exclude usage of without incurring very high transaction costs and costs to individuals. This can make environmental policy controversial, especially when you take what was a free good - such as the ability to pollute at no cost - and put a price or cost on it.

Environmental policy is often foremost about creating and enforcing property rights for environmental resources at minimum cost. In practice this means that collective or public authorities assume de facto ownership and take action to restrict previously unlimited free access to resources, such as water or air, as places to pollute. Who pays becomes an issue of critical importance and controversy. While restrictions can benefit society at large by improving water and air quality, they can come at a cost. This includes not only transaction costs for implementing, monitoring, and enforcing restricted use but also costs for those individuals and companies that had been polluting at no cost and now have a cost imposed on them or have to change their behavior and find other solutions to their waste disposal.