Yesterday’s post explained how market incentives can address environmental issues, including the believed-to-be negatives of climate change. Prices of inputs and outputs, utilizing resources even if they are subject to the tragedy of the commons, incorporate dynamic environmental changes. Markets, in other words, offer the potential for dynamic responses.
If climate change reduces the productivity of land for wheat production, for example, the price of land will be high relative to its productivity. This generates an incentive for wheat farmers to seek new places for wheat production where land prices are lower. Hence, the 2012 Bloomberg news headline, “Corn Belt Shifts North With Climate as Kansas Crop Dies.” Therefore even if the atmosphere as a GHG sink and GHG emissions themselves are not priced, prices correlated with the effects of climate change will induce adaptation.…
“In the absence of property rights to the commons, there are still two other entrepreneurial responses that lean in the direction of rational optimism: one is discovering new ways of getting more from limited resources—productivity; and the other is finding substitutes for increasingly scarce resources.”
Rather than simply throwing up our hands in despair with respect to what appear to be intractable problems of establishing property rights and encouraging markets in regard to global climate, we turn to a major theme of free-market environmentalism—dynamic markets provide the best hope for human interaction with dynamic environments.
Once we abandon static models of market equilibrium and recognize that people respond to changing environmental conditions (e.g., experiencing rising sea levels), as well as resource prices that reflect those conditions (e.g., falling beachfront property values), the prospects of gloom predicted by the 2014 IPCC Report or by National Climate Assessment Report for the United States, [1]become less likely.…