Climate, energy and water: the potential roles and limitations of markets

Introduction We are all familiar with markets – the concepts of supply and demand. Spatially or virtually, markets are institutions where rights to use property (or to not use it) are exchanged between buyer and seller, for a financial consideration. During the twentieth century, people throughout most of the world learned to operate in real estate markets, labour markets, financial markets, capital markets, and machinery and auto markets. In western market economies, decisions about what goods and services to produce and sell, when, where and how, and what goods and services to buy and consume/use are basically left to the private decisions of billions of enterprises and consumers. This is all based on the assumption that each of those market participants is capable of working out what is in her/his/its own best interests. Technically, the presumption is that each individual understands and is fully informed about its own requirements, and the attributes of all available goods and services and their ability to meet those specified requirements. Obviously, this set of presumptions is rarely completely true, but it seems to be ‘close enough, much of the time’ for markets to work ‘reasonably well’ in allocation of resources for production and consumption – what the eighteenth-century philosopher – economist Adam Smith called “the invisible hand of the marketplace”. Nevertheless, policy discussions and journals are now full of circumstances where the outcome from free exchange in markets is most unlikely to accord with what is in the longterm best interests of the whole society; the so-called market failures . For two centuries, economic theories assumed away all these ‘unfortunate anomalies’. However, research on market failures is now a major feature of many economics textbooks. The most common of these are: • the existence of public goods where everyone benefits from their provision whether or not they contributed to pay for them (eg defence and street lights). […]