Thoughts on economics and liberty

Environmental policy in a free society

(This article was published in Freedom First, May 2010).

The liberal is deeply committed to a clean and healthy environment. Sadly, India’s continuing fascination with socialism and centralised approaches has converted the country into a toxic garbage dump: our rivers and lakes are badly damaged, our wildlife and rare fauna are threatened with extinction.

Bad stewardship of the environment harms both our health and wealth. Toxic waste, polluted air and filth harms our health, but the economy suffers as well. For instance, we don’t get as many visitors to the Taj Mahal as we could have because the moment they enter Agra, obnoxious stink overpowers them. Similarly we lose many economic opportunities because we can’t develop nature sports or tourism in ravaged and filthy natural habitats.

Socialism, the enemy of the environment

Nehruvian socialism harmed India’s environment in many ways. Despite so-called family planning, socialist policies directly led to a dramatic increase in India’s population. For details please see Breaking Free of Nehru (page 233, While a large population can be very good for a nation, it can prove fatal for the environment if the government is corrupt and incompetent and does not hold this large population to account for the harm caused.

Also, while wealthy societies have the wherewithal to clean up their rivers and lakes, socialist societies like India can’t afford to do that. And our governments lack any capacity whatsoever to enforce any law. Instead, our corrupt lawmakers and their cronies have looted our natural resources for 60 years, and connived with industries that harm the environment.

Freedom is not license to harm

What would happen differently if India were to some day become a free society? In a free society everyone is accountable for the harm they cause. There is no freedom to pollute. Negative externalities are their heart ethical and governance failures (not ‘market failures’, as economists like to call them). A free society simply does not tolerate ethical or governance failures.

This task – of environmental stewardship in a free society – is not trivial. The harm caused cannot always be easily attributed to a particular individual. Those who cause harm do not voluntarily come forward to disclose their polluting activities, either. Indeed, in some cases entire societies collude to pass on costs to future generations! Harm such as acid rain can also spread across national borders. Environmental policy is thus a very challenging area. But by carefully investigating incentives, the free society can achieve reasonable solutions and maintain a healthy environment without reducing economic activity unnecessarily. Let me outline some of these solutions.

Non-regulatory solutions

The mere existence of negative externalities should not be assumed to call for government intervention. Where affected parties can identify each other clearly and the cost of negotiation is low, the externality can be mitigated through bargaining (see Ronald Coase’s 1960 paper, The Problem of Social Cost). The government must therefore seek to clarify property rights and not rush into taking direct action. The use of intelligence, not brute force, is called for.

This also applies to the preservation of flora and fauna. If businesses are allocated property rights to rear and sell endangered species, then the supply of these species will increase, removing the threat to their survival. It is beyond belief that we even try to lecture others to stop using ivory, rhino horns or tiger skins. By the time we stop our puerile lectures to Chinese smugglers, all our precious animals would have died.

When have prohibitions ever worked? Legalising (and appropriately regulating) trade in environmental goods is crucial if we want a healthy environment. Let India earn an honest living from its fauna, not endanger its tigers and rhinos through socialist policies that only end up benefitting smugglers and arms dealers. I have absolutely no doubt that without well-regulated property rights and legalised trade, all endangered species in the world will die out.

Regulatory solutions

The property rights option may not be feasible in all cases (although its applicability is quite vast). Where direct government intervention is considered necessary, the costs and benefits of all options should be carefully scrutinised and only the most effective (and efficient) solution deployed. Options include:

a) Market based instruments: Creating markets for externalities, such as cap-and-trade schemes, can sometimes be viable. In these schemes, polluters receive signals directly from the market about whether they should spend money to reduce pollution or simply buy permits to pollute. 

b) Mandatory change in behaviour: After a cost-benefit analysis, a government could, in some cases, mandate the use of non-polluting technologies. This direct approach can minimise economic harm while reducing pollution. Mandatory restrictions or standards could be relevant for positional arms races in which it is not in anyone’s interest to stop the harmful activity unless everyone else gives it up. Thus, athletes would use increasingly greater amounts of anabolic steroids unless everyone was prohibited from using them.

c) Mandatory insurance and good behaviour bonds: Where the risk of environmental harm is considerable, mandatory insurance requirements can be imposed as part of licence conditions for starting a business. In some cases, good behaviour bonds can be mandated in lieu, although these tend to lock up valuable capital.

d) Pigovian tax: In this case a tax is imposed on the polluter. The tax is equal in value to the harm caused. The polluter internalises the costs imposed on others, and is therefore motivated to reduce the pollution. Where specific polluters can’t be readily identified, Pigovian taxes can be imposed on upstream activities that contribute to the pollution (for instance, a general tax on all cars regardless of the actual pollution caused by a car). It is important that Pigovian taxes are offset by reducing taxes elsewhere, else resources will be transferred from the private sector to government, leading to a drop in productivity.

e) Criminalising the harm: Where extremely severe harm can be caused, such as by the transportation of dangerous goods without appropriate precautions, criminal penalties can be imposed. Prohibitions may also appropriate where identifying a specific polluter is difficult or a single polluter causes only a small part of the harm. An example is the ban on smoking in bars where no specific individual can be held responsible for cancer that a bartender may develop after working in a smoke-filled environment.

In addition, there are many other ways to preserve the environment. The problem that India faces, however, is that none of these ideas are either tried, or if tried, implemented faithfully by its corrupt governments.

Freedom Team of India

The solution for India is for its liberals (such as the readers of this esteemed magazine) to take responsibility for India and work to directly improve India’s governance. The Freedom Team of India ( is a team of leaders who will, when ready, contest elections under the banner of liberty and provide good governance to India. Unfortunately, the team has struggled over the past two years to find enough leaders to start a serious political movement. I trust you will help in some way.


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