Two weeks ago for this weekly column, our newest Murphy Center writer, Dr. Roscoe Scarborough, wrote about two conflicting moralities that are dominant in our culture—collectivistic morality and individualistic morality. According to Dr. Scarborough, progressives tend toward collectivistic morality and conservatives tend toward individualistic morality.
Then last week, Dr. Heather Farley wrote about an interesting case in which markets are emerging to help offset carbon emissions by paying firms not to cut down trees.
These two columns by my colleagues are related in a fascinating way.
The standard, modern take on market economics is that markets generate efficient outcomes when players behave in their own self-interest. It is no surprise, then, that American conservatives, with their individualistic morality, are often the loudest opponents of government regulation of markets.
On the other hand, collectivistic American progressives often argue that government intervention in markets is necessary to promote the common good. Their arguments often focus on what a Principles of Economics textbook might call “market failures,” or situations in which individuals’ behaving in their own self-interest do not produce an efficient outcome or, more commonly, do not produce an outcome that is equitable for all groups or individuals.
In this new market that pays firms to leave trees, we see a clash of the two moralities. According to The Journal podcast’s August 23 episode, the carbon offset market got its start due to government regulations, but the market has really begun to soar recently because of pure, free-market pressures. Firms have found that it is good business (good press) to promise to reduce their carbon footprint. This is likely because more Americans have begun to think collectively about sustainability and climate change. As consumers care more about the process by which goods are produced, businesses also begin to care.
And this is the type of situation that makes an economist’s heart flutter! The market is doing something traditional theory says it would never do on its own—internalizing an externality. Environmental impacts are classic examples of negative externalities, or negative impacts of market transactions on individuals not directly involved in that transaction. When everyone involved in a transaction behaves in their own self-interest, the market ignores the interest of third parties, and externalities cause markets to fail to reach an efficient level of production.
But, market demand is derived directly from consumer preferences. And, the fallacy of the standard view of market behavior is that it assumes market participants hold an individualistic morality, so that their preferences are for self-interested behavior.
When individuals begin to think collectively, their preferences change, and market magic takes over! The market Demand curve now shifts to reflect preferences that consider environmental impacts to be important. When Demand shifts, producers maximize profits with a pivot to meet the new consumer preferences. And, without government action, the market begins to consider trees more valuable planted than cut.
Dr. Farley makes a compelling case that, while carbon offset markets are a move in the right direction, they do not do enough to combat climate change, as they do not reflect systemic improvements in sustainability.
But, even this relatively small change for sustainability is a big deal for how we view the power of free markets. Is it possible that markets are now beginning to correct their own “failures” in environmental externalities? I am on the edge of my seat!
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Dr. Melissa Trussell is a professor in the School of Business and Public Management at College of Coastal Georgia who works with the college’s Reg Murphy Center for Economic and Policy Studies. Contact her at mtrussell@ccga.edu.
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