We know today that the traditional market of Adam Smith was a fully distorted markets in environmenal and social terms as it assumed social and environmental externality neutrality...
In 2012 a consensus was reached to correct Adam Smith's traditional market model to make it environmentally friendly or making it reflect environmental concerns....
The correction of Adam Smith model could have been done in two ways:
a) Externality internalization by adding a green margin to the traditional market price creating that way green market prices; and
b) by externality managment by bringing an array of green taxes creating that way dwarf green market prices.
Which correction do you think leads to the most efficent, science based, traditional market correction?....
I think correction a) externality internalization, what do you think?
https://www.researchgate.net/publication/279533801_Subsidies%27_unintended_inequities_How_dynamic_finance_addresses_just_rewards_dilemma
I attempted to provide some suggestions on why tinkering with the green market with subsidies seldom works in the paper we presented to a business ethics conference (see link above).
In my view, there are a number of flaws in how we look at environmental impact and the costs of mitigation from polluting technologies. As your question suggested, externalities simply mean that these are costs (or benefits) that cannot be appropriated. Hence, the "big hand" of government is resorted to correct this "externality" as a way of "internalizing" them. This thinking is premised on the following erroneous concepts:
1. Individual investments are optimized individually, when in reality the value of each investment (i.e. wind power) is different to a coal or gas-dominated portfolio of power generating assets.
2. By taking individual assets (or technologies) as the unit of optimization, a subsidy is applied to equalize the costs between fossil fuels and renewables. However, with volatile prices, the "correct" answer to the "right level" of subsidies is indeterminate.
3. By choosing a technology champion, which is what you do when a preferred technology is subsidized, you are bestowing a foresight to policy that does not exist.
The remedies? Let firms decide on how to respond to the opportunities that environmental investments offer. Policy is meant to penalize polluters when the source of pollution is attributable and identifiable. Hence, through carbon taxation, while imperfect, a price signal is given through a carbon tax as to what combinations of technologies and any shifts in portfolio mix are best taken by managers to respond to the price stimulus.
Conference Paper Subsidies' unintended inequities: How dynamic finance addres...
Dear Ricardo, the questions is fixing the adam smith traditional market model by internalizing environmental externalities and making once and for all endogenous issues vrs fixing adam smith tradiional market model by continue to treat environmental issues as externalities.....
If you internalize you are in perfect green market territory and therefore you do not need government intervention in perfect markets right? as green producer and green consumer would take the right signal from the perfect green market price to produce and consume the green quantity....
If you do not internalize then you are in the dwarf green market territory and therefore you need heavy government intervention through an array of green taxes to push Adam smith model as close as possible to perfect green market conditions....here the future of renewables as substitutes becomes attractive....
the issues you discribed are right, but apply only the less efficient solution which is the one that somehow is being implemented right now in all the countdries signatures of the 2015 paris agreement....Under continue externalization....the future of renewables as substitutes is not that attractive....
So internalizing is not just the right science based solution to shifting from perfect traditional markets to perfect green markets and green economies and green growth, it is the most efficient solution....
You may find the ideas in the following article interesting....they(everybody it seems) started dealing with environmental issues with the wrong green foot.....
Perfect Green Markets vrs Dwarf Green Markets: Did We Start Trying to Solve the Environmental Crisis in 2012 With the Wrong Green Foot? If Yes, How Can This Situation Be Corrected?
https://www.researchgate.net/publication/305994500_Perfect_Green_Markets_vrs_Dwarf_Green_Markets_Did_We_Start_Trying_to_Solve_the_Environmental_Crisis_in_2012_With_the_Wrong_Green_Foot_If_Yes_How_Can_This_Situation_Be_Corrected
Article Perfect Green Markets vrs Dwarf Green Markets: Did We Start ...
Lucio,
In reality, a perfect market does not exist. For this reason, the very premise of a market being able to function is having a set of rules that the market players broadly subscribe to. This is where the government comes in - as an arbiter of some sort through their regulatory and social function.
I would rather start by recognizing how markets actually operate - It is volatile, dynamic and often uncertain at the level of outcomes, although conforming to certain patterns. For the specific case of renewables, this is actually not a case of having a dichotomy where "green is good" and "fossil fuel is bad". This is the premise the sets the green movement on the wrong foot (to use your expression).
Do you think that mainstream thinkers all over the world, UN, world bank...all countries signature of the Paris agreement are using dwarf green market thinking instead of perfect green market thinking because they think perfect market do not exist anyway? I do not think so. Dward markets imply shallow changes, perfect markes imply deep changes....hopefully you know what I mean...
If facing environmental issues head on was the goal as they said in RIO +20 by moving to green markets, green economy, and green growth that mean as requested by the 1987 bruntland commission to internalize environmental issues and when you internalized environmental issues in the pricing mechanism of the perfect market of Adam smith you shift directly to perfect green market thinking....probablly going this way was a hard sell, so they went dwarf green market, but calling it green economy/green growht creating a theory-practice inconstency which I highligted....
I will leave it here Recordo, internazing means creating perfect markets and efficient production, externalizing means creating dwarf markets and inefficient production as far a the question is concerned.
In case you have not seen this article, you can use it as food for thoughts
Beyond Traditional Market Thinking: What is the Structure of the Perfect Green market?
https://www.researchgate.net/publication/302025169_Beyond_Traditional_Market_Thinking_What_is_the_Structure_of_the_Perfect_Green_market
Have a nice day
Article Beyond Traditional Market Thinking: What is the Structure of...
Good day Ricardo,
I am sharing here this article unpublished and you can use it as food for thoughts:
Is Environmental Externality Management a Correction of Adam Smith’s Model to Make It Environmentally Friendly and Shift it Towards Green Markets or Is It a Distortion on Top of Another Distortion?
https://www.researchgate.net/publication/309463581_Is_Environmental_Externality_Management_a_Correction_of_Adam_Smith%27s_Model_to_Make_It_Environmentally_Friendly_and_Shift_it_Towards_Green_Markets_or_Is_It_a_Distortion_on_Top_of_Another_Distortion
Have a nice day
Article Is Environmental Externality Management a Correction of Adam...
Dear friends, here sharing my most recent article which I trust you may find interesting in terms of food for thoughts:
If Going From Free Markets to Non-Free Markets is the Way to Go: Does This Means the End of Rational Decision Making Thinking or Is This Just a Temporary Block of a Perfect Paradigm Shift to Green Markets?
https://www.researchgate.net/publication/312092336_If_Going_From_Free_Markets_to_Non-Free_Markets_is_the_Way_to_Go_Does_This_Means_the_End_of_Rational_Decision_Making_Thinking_or_Is_This_Just_a_Temporary_Block_of_a_Perfect_Paradigm_Shift_to_Green_Mark
Article If Going From Free Markets to Non-Free Markets is the Way to...
Those interested in green market thinking may find the following article full of food for thoughts
From Traditional Markets to Green Markets: A Look at Markets Under Perfect Green Market Competition
https://www.researchgate.net/publication/330617155_From_Traditional_Markets_to_Green_Markets_A_Look_at_Markets_Under_Perfect_Green_Market_Competition
https://www.researchgate.net/publication/330701187_From_Traditional_Markets_to_Green_Markets_A_Look_at_Markets_Under_Perfect_Green_Market_Competition
Sharing publication
The Flipping of Traditional Economic Thinking: Contrasting the Working of Dwarf Green Market Thinking with that of Green Market Thinking to Highlight Main Differences and Implications
https://www.researchgate.net/publication/334535200_The_Flipping_of_Traditional_Economic_Thinking_Contrasting_the_Working_of_Dwarf_Green_Market_Thinking_with_that_of_Green_Market_Thinking_to_Highlight_Main_Differences_and_Implications
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