Question

According to neoclassical economists, is there an important role for public policy in solving environmental problems? Some people may say that government intervention is not needed because we can inform the public of these environmental problems and they will fix it themselves without the help of the government. How would neoclassical economists respond to this?

Use micro theory to answer the above question.

Answer 1

Neoclassical way to deal with the ecological

Financial aspects as applied to natural issues would then be able to be described by the use of standard neoclassical hypothesis to the climate. The accentuation is on recognizing conditions in which the market is probably going to fall flat in its undertaking of dispensing assets productively between various utilizations and in planning arrangements to empower the administration to intercede to 'right' the market disappointment.

Stage 1 Break down the climate into wares

At the core of the neoclassical way to deal with natural financial matters is the expect to transform the climate into a product which can be broke down like some other ware. The starter practice is to separate the climate into its constituent merchandise and ventures. For instance, wetlands give a scope of products, (for example, fish, water, wood) and administrations (water filtration, water transport, climatic guideline). When characterized in item terms, the climate can be brought into the market economy by building gracefully and request bends for ecological products and ventures and contributing business sector costs.

Stage 2 Determine the fitting degree of natural security

The degree of natural insurance that is considered 'ideal' relies upon customer needs (requests) and the gracefully costs (expenses of assurance and opportunity costs). Natural valuation techniques are a basic apparatus of the ecological financial analyst. They might be utilized to build theoretical interest bends for ecological merchandise and ventures when there are no business sectors for these assets. Building request bends includes assessing readiness to pay for ecological improvement or eagerness to acknowledge remuneration for natural misfortunes. Eagerness to pay measures depend on customer inclinations and needs, and are obliged by capacity to pay (ie earnings). In the hypothetical situation where an appropriate interest bend with a scope of qualities can be resolved, its convergence with the flexibly bend will show the degree of insurance for that ecological product which speaks to the most effective assignment of assets in the public eye.

Stage 3 Achieve the ideal degree of natural insurance, ideally

The subsequent stage demonstrated how monetary hypothesis and techniques can be utilized to recognize the most productive degree of natural insurance. The third stage is worried about accomplishing this level in the most effective manner - these ideas give the establishments to the plan of ecological approach. As per this rationale, the most productive method of accomplishing the ideal degree of ecological assurance is to give natural expenses and advantages 'costs' in the business sectors where they happen. In this manner the estimation of the climate can be reflected in reality where choices are made. This should be possible basically in two different ways. One is to change the costs of existing business sector exercises by burdening ecological harm, (for example, contamination or hurtful items) or by financing natural improvement. The other route is to make markets for natural merchandise and ventures.

The main theoretical foundations for the field of environmental economics are found in the theory of externalities due to market failure. Externalities are present when the activities of an economic agent like a firm have external consequences for other agents other than by affecting prices, and these external effects are not compensated for.

The usual diagnosis and prescriptions for dealing with externalities come in three types:

• The problem is due to incorrect prices so adjust them by using taxes or subsidies.
• The problem is due to missing markets so create a market for pollution by use of tradable permits.
• The problem arises from imperfect property rights which need to be amended.

These three solutions are the mainstay of neoclassical solutions for most environmental problems. The latter solution is a laissez-faire approach of leaving the outcome to the market, while the first two approaches are more interventionist approaches while still harnessing the power of the market. In fact, most environmental problems are externality problems like traffic congestion, dumping of toxic wastes, emission of greenhouse gases, pesticides in food chains, acid rain, and ozone depletion. The list is extensive and so is the scope of economics for environmental management.

'theory can be helpful to policy makers by pointing out surprising relationships unlikely to be recognised by unaided common sense; by noting significant exceptions to principles widely accepted; and by offering generalizations of its own.'

Three general types of contributions can be identified from the application of the theory to policy:

• counterintuitive observations
• discovery of significant exceptions
• derivation of relationships of general validity

However, to the consternation of the economics profession many of these insights, particularly those on appropriate instrument choice, have not found their way into policy and legislation on pollution control.