Markets and environmental regulation

Susse Georg & Inge Røpke

There is no direct connection between the way in which property rights for resources are organised and the way in which the products that are produced based on the resources reach consumers in the end. The products can reach the consumers in several ways. Firstly, producers can use the products themselves, which is what households often do when they grow their own vegetables or keep chickens in the garden, while fishermen can eat the fish they have caught. Secondly, products may be given away, such as between friends, or as often happens between the public authorities and citizens. Thirdly, the products may be distributed among consumers through markets. Markets can distribute goods that are made within the framework of different property rights systems and by different economic entities (households, companies, public authorities). This means, for example, that the ownership and use of a resource may be organised as a commons, while the products of resource use can be traded on a market. As markets in modern societies play an important role as a link in delivering the products to consumers, it is worth examining how they function and the role they can play in environmental regulation.

 

Free markets do not exist

In the debate about markets and the environment, a contrast is often made between free markets and regulation, where regulation is considered to be something that impedes the functioning of the free market. However, within ecological economics, this is considered to be a false opposition. As described in the sections on conflicts of interest and side-effects, environmental regulation may indeed imply restrictions on what the individual owner of a resource may do with his property because the interests of others or ‘the common good’ have to be taken into account. But this constitutes only a very small part of all the regulations that make up the conditions for a market. There is simply no such thing as a free market. As the development economist, Ha-Joon Chang, puts it (see: https://www.youtube.com/watch?v=R4BelDrWWt0), all markets are regulated: If you think a particular market is free, it is only because you agree so much with the regulations that support the market that you can not see them. For example, few would advocate reinstating child labour. The former US Labour Minister and political scientist, Robert Reich, makes a similar point here: https://www.youtube.com/watch?v=dikqwpp3ylA (myth No. 2). In an environmental perspective, what is important is regulating and designing markets in ways that promote environmental goals.

A market is often described as a place where trade occurs. It is a place where sellers and buyers meet. In return for payment, buyers receive some of the sellers’ goods. Think of flower and fruit markets or flea markets: the buyer and seller are in close interaction, but this relationship becomes more distant in a supermarket. You are not in direct contact with the seller. There are other markets where this relationship is even less clear: Just think of the electricity market, the market for CO2 quotas or the financial market. Here the distance between the buyer and the seller is very great, and the relationship between them very indirect. In order to maintain a market, there must be some buyers who keep returning. However, it is primarily the sellers who determine how stable markets are because it is they who decide what is sold and at what price. Although there is a certain degree of reciprocity between buyers and sellers, it is the sellers’ interest to survive – to ensure a reasonable income (profit). The opportunities for this are influenced by who else is selling goods on the market – the competitors – and what they are doing.

Even though the above markets are very different in terms of the products and the type of buyers and sellers, they are all characterised by specific rules. The economic sociologist, Neil Fligstein, identifies three types of rule, which together characterise all markets. These are rules that specify: (1) property rights; (2) control or governance structures, and; (3) how trade occurs – how the transactions on the market take place. These rules are expressed in legislation as well as in the market actors’ understandings and practices.

Without clear property rights, it is impossible to have a market because who owns what is not known and, therefore, who is entitled to trade with the product in question. In other words, property rights are rules that define who is entitled to the profit from the sale of the goods. However, property rights can assume many different legal forms, for example, related to the different types of companies (private/family owned, partnerships and limited liability companies). What ownership rights do is they define the relationships between the owners and everyone else, thereby defining the power relationship between the parties on the market.

Control or governance structures encompass two aspects: society’s general rules regarding how competition should take place and the rules for how companies can be organised, i.e. which types of companies are allowed. These are the ‘rules of the game’ that determine how the market works. This is either stated formally in law or informally through institutionalised practices. The Competition Act, for example, aims to promote effective societal resource utilisation through effective competition for the benefit of businesses and consumers. Therefore, the law prohibits, for example, certain types of anti-competitive agreements. With regard to informal institutionalised practices, these primarily concern advice from professional organisations to market actors about how to best exploit the competition rules or how best to organise themselves in relation to their competitors.

Trade rules specify the conditions for how trade on the market – transactions – can take place. There are many different types of rules that focus on the health and safety of products, transport, insurance, contractual compliance, etc., all of which seek to stabilise the market and ensure that all companies on the market are subject to the same conditions. If trade is international, trade agreements between countries are particularly important.

In addition to these rules, the market actors’ implicit understanding of how the market should function also plays an important role. This understanding evolves over time, especially with regard to the relationship between existing companies and new companies entering the market. The existing companies on the market do not want additional competitors and, therefore, attempt to establish different types of barriers (for example, in the form of production standards), which may block the entry of new companies onto the market. The new companies will be able to challenge market stability if they succeed in gaining a foothold on the market.

Even though these four factors contribute to creating the conditions on the market, i.e. property rights, and stabilising them by specifying the ‘rules of the game’ as to how the market should function (with the aid of the competition rules) and how the transactions should take place (for example, trade agreements), the conditions are constantly being challenged. The existing companies on the market, new companies wishing to enter the market, and consumers are all interested in influencing these four conditions and there is, therefore, a continual political struggle to change them. For this reason, the market is not something that is just there. It is the result of market actors’ struggle to orchestrate, organise and design the market conditions so that they benefit themselves as much as possible. In other words, the market conditions are not a given as they could be changed if there was sufficient political support for it. Markets are created.

What creates the dynamics of the market is the competition between the sellers (companies) to ensure the buyers’ favour so they come back and remain good customers. Competition is considered to be the solution at the moment as more and more social functions are being exposed to competition, for example, the liberalisation of the electricity market or the privatisation of water supply. The reason for this is the strong impression that competition between private suppliers will ensure that society’s scarce resources are used most effectively. However, even according to mainstream economic theory, this only applies to perfect competition where the market is open to all (no barriers to the entry of new businesses), the companies are selling identical products, there are many companies present, and none of them can control the market price, while buyers have complete information about the products so that they can choose the best. However, this is far from the world of reality. Nevertheless, the idea that ‘market forces’ will ensure the most efficient utilisation of resources is widespread. Adherents to such an idea consider market forces to be natural and not something that are created by political processes.