Complete 2 pages APA formatted article: The concept of a Property Right. a) One popular proposal to combat the effects of carbon emissions on the Earth’s climate is a so-called “carbon trading scheme”

Complete 2 pages APA formatted article: The concept of a Property Right. a) One popular proposal to combat the effects of carbon emissions on the Earth’s climate is a so-called “carbon trading scheme”, which is another wayof saying “market-based” solutions to climate change. Carbon trading is particularly popular with those who favor the market for the allocation of goods and services in accordance with supply and demand as it avoids putting the government in the position of directly regulating all carbon emissions. Instead, under a carbon trading scheme, a government only sets a cap on the amount of pollutant that may be emitted without causing harm to the environment or society. Under this system, it is expected that market forces will drive down the release of pollutants into the environment, insofar as the cost of releasing pollutants costs more than cleaning up and disposing the pollutant [LIVERMAN 2008]. In the short-term, carbon trading is meant as an incentive. That is, firms are punished by being forced to buy more permits to pollute if they need to. firms are rewarded when they can sell these permits because they have reduced emissions. In the long-term, it is hoped that carbon trading will reduce emissions enough to make a significant contribution to reducing climate change.

However, carbon trading schemes largely appeal to those people whose ideologies bias them toward the market-based solution in every case. In fact, there is no economic evidence that price effects through caps and limits is more effective or more desirable than direct regulation or command and control [PARKER 2007]. There is a theoretical problem and a practical problem with trading schemes. The theoretical problem is that trading schemes must rely on the market to form a price mechanism to limit the supply of pollutants—the same market that failed in the first place to provide the socially acceptable outcome. This dissonance poses a difficulty with respect to whom society must trust with achieving reductions in climate change. The practical problem is how carbon derivatives would be traded. Hybrid securities and exotic derivatives were at the root of the most recent recession. It might be difficult to trust these same institutions.

b) A property right is the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals [ALCHIAN 2008]. The problem of externalities extends to the negative effects of action has on others, and the disconnect between the negative effects and the benefits the actor receives from performing that action. In the case of pollution, the polluter saves money and resources by not disposing of his pollutant properly. it is society and the environment that takes the costs of such an action [LAFFONT 2008]. The Coase theorem deals with the efficiency of allocation in the presence of externalities. In the absence of direct government intervention, bargaining produces an efficient outcome.

According to the Coase theorem, when people own property, they want this property to be used in the most efficient manner possible. Whenever there is a higher economic gain, one will follow the incentive to create that efficiency. Thus, bargaining agreements are reached to reach mutually advantageous deals. Coase hopes this theory deals with the problem of externalities by showing that, considering self-interest, there are local solutions to any case where an externality may arise. For instance, if two companies want to use a narrow canal from one body of water to another, an externality would be created if both companies used their resources in this same place [JOHNSON 1973]. Under Coase’s analysis, the two companies would reach an agreement to make the most efficient use of the public resource, thus limiting the externals inherent to the problem.


ALCHIAN, A. March 2008 Library of Economics and Liberty, accessed 14 Oct 2010

JOHNSON, D. 1973 “Meade, Bees and Externalities” The Journal of Law and Economics, 16: 35-5

LAFFONT, J. 2008 The New Palgrave Dictionary of Economics Palgrave Macmillan New York

LIVERMAN, D. 2008 “Conventions of climate change: constructions of danger and the dispossession of the atmosphere” Journal of Historical Geography, 35: 279

PARKER, E. 3 December 2007 “Green Structured Products are likely to Proliferate”, accessed 14 Oct 2010


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