It is a mistake to assume that environmental problems can be solved by a free market approach. To be fair, a tax on pollution depends on absolute knowledge of the total long term cost of that pollution.
Free Market Approach:
Company A builds high end floppy dildos and as part of manufacturing releases gas G into the air. Gas G is known to cause significant damage to species of tree T (of no known economic benefit). Company A is charged X$ based on current projections of damage that gas G will cause. Company A does the cost/benefit calculation and figures that paying X is a reasonable cost of doing business, so they continue to release G. One hundred years later, it turns out that G has wiped out species of tree T. Species of tree T is the only known source of a cure for the new airborne superCancerAIDS disease that is wiping out humanity. Company A has long since gone out of business due to the popularity of artisan crafted hand carved dildos.
This ignores the probable effects on the company due to the laws of economics. The company cannot continue selling its product in the same quantity at a higher price even if it had a monopoly on marital aids, and the substitution effect (such as high end personal escorts perhaps) would kick in and divert even more of their business.
Most products and services are usually not viable once it goes above a certain price due to various economic phenomena, even if where that price is set by the free market is already quite high. Even monopolies can't raise their prices too much or they just collapse (if a copy of Windows cost forty five million dollars for example, Microsoft would fold very soon unless it quickly lowered its prices again).
Agreed. All of this depends on the price being raised high enough though. In the example, there would be no economic justification to raise the price this high . . . because the economic value of T is not high.
Without a free market approach:
Company A builds high end dildos and as part of manufacturing releases gas G into the air. Gas G is known to cause significant damage to species of tree T. When the damage to tree T population is discovered, the government bans the use of G. Company A figures out a more expensive but less environmentally damaging way to manufacture floppy dildos. One hundred years later, tree T (formerly of no known economic benefit) saves most of humanity from superCancerAIDS.
This presumes that the government knows Gas G is actually bad, and it's not based on a hysterical study about Gas G causing the shakes which is later discredited, but the law remains in place because of special interest lobbyists from the people who make alternatives to gas G, inertia, lack of political incentive to repeal it, etc.
Yes. Both examples presume that the effect of G is known. It's not possible to control for something if you don't know the cause.
It also suggests that the decision making power of a small group of people is greater than the decision making power of a large group of people.
How so? What small and large groups of people are you referring to?
Private companies can't be held liable for the true cost of their actions unless you have knowledge of the future. It's just not possible to calculate all the costs involved when wiping out a species or changing the environment.
While this is true in the absolute sense, it's not an argument against a free market solution being the best one. No one has perfect knowledge of anything, however you harness more knowledge by opening the decision making to more and more people.
How is the decision making open to more people? There are three groups of people in both cases; the public, the private industry, the government.
In both examples given, the public is free to investigate the issue to their heart's content. In a regulated approach, democratic governments make decisions based on public input so if enough interest is received this will change how the problem is handled. In a free market approach the public decides what to buy, so if enough interest is received and if the interest outweighs the interest for the product this will reduce demand for the goods that the company produces. The problem with depending on the public to investigate and understand these issues is that there are very few people qualified to do so . . . and then from that pool there are even fewer people who care to do so.
Private industry has a notorious track record of suppressing information that could be damaging to business. They cannot be reliably depended upon to make a decision in the best interests of the public if there is any chance that more profit will be made otherwise.
Finally, we have the government. In both cases given the government would be monitoring the situation. In the first case the government attaches a monetary value to the trees being wiped out (which requires guessing about potential future value and current economic impact). In the second case, the government simply prevents use of chemical G because of the potential issues caused by loss of T.
Whatever way I look at it, the same number of people are involved in making a decision.
Think of it this way: actively managed mutual funds rarely beat a simple index fund because the index fund harnesses the knowledge of an entire market, while the active fund draws on a much smaller pool of expertise.
When you pick an active fund (i.e. a government bureaucracy) to manage your investments, you may get lucky and beat the market, however you're far more likely to underperform it if anything. You also have to deal with the fact the fund managers are more loyal to their employers than they are to you, the fund management will change over time, it will demand more staff and higher compensation, it will lose sight of its original goal, etc.
Or you can buy an index fund (i.e. the entire market) and realize while it might not beat the highest performers, it's going to be the best overall solution relative to how much it costs and what you get for the investment.
The same number of people are involved in making the decision in both cases, so your basic premise here is flawed. In addition to that though, plants and animals aren't mutual funds.
* When a company goes bankrupt another company can simply take it's place. When something goes extinct, there may not be anything that can ever take it's place again.
* Mutual funds (and the stock market in general) depend on constant growth. This is a totally different model than in the natural world, where constant growth invariably leads to restricted resources and is followed by massive death.