Is Environmental Externality Management a Correction of Adam Smith’s Model to Make it Environmentally Friendly and Shift it Towards Green Markets or is it a Distortion on Top of Another Distortion?
Keywords:Market failure, Green markets, Traditional market, Market distortion, Cost internalization.
When Adam Smith gave us the theory of the perfect market in 1776 he gave us a model with two embedded distortions, one social and one environmental, because he assumed that economic activity works under social and environmental externality neutrality or it had minimal social and environmental impacts making them external factors to the economic model. In 1987 the Bruntland Commission said in “Our Common Future” that evidence existed indicating that social and environmental impacts are relevant and needed to be incorporated or included in our development models. In essence, the Bruntland Commission called for the fixing of Adam Smith’s tradit ional market model. From 1987 to 2012 a process of testing different sustainable development models took place and in 2012 Rio +20 it was decided that development now was going green market, green growth and green economy through a win-win partnership environment and the economy to make the economy an environmentally friendly entity. To correct the environmental distortion embedded in Adam Smith’s model the only thing that needed to be done was to internalize the cost of being environmentally friendly in the pricing mechanism of traditional markets to shift them to green markets, green producers and green consumers, but instead they went the way of environmental externality management (e.g. carbon pricing) as they took the environmental distortion embedded in Adam Smith’s model as an environmental externality led market failure. Hence, instead of correcting Adam Smith’s model to eliminate the environmental distortion by reflecting environmental costs in the pricing mechanism and making that way environmental issues endogenous issues as they should have been from the beginning had Adam Smith proposed green markets instead of the traditional market they are treating an embedding distortion in Adam Smith’s model that before was irrelevant, but now it is relevant, as an environmental externality led market failure. And this raises the question: Is environmental externality management a correction of Adam Smith’s model to make it environmentally friendly and shift it to green markets or is it a distortion on top of another distortion? Among the goals of this paper are: a) to show analytically and graphically that the proper correction of Adam Smith’s model to eliminate the embedded environmental distortion in it and shift it to green markets is environmental cost internalization; and b) to point out analytically and graphically that environmental externality management is a distortion on top of an embedded environmental distortion in Adam Smith’s model; and therefore it is unconnected to perfect green market thinking.