Transaction Costs and Environmental Markets: The Role of Entrepreneurs

by Terry Anderson and Dominic Parker via the Property and Environment Research Center

At the core of environmental economics is the potential for a divergence between private and social costs (based on the work of A. C. Pigou) and the potential for private contracts to shrink this divergence (based on the work of Ronald Coase). A close examination of Pigou and Coase reveals that the two are not so far apart, with Pigou emphasizing “technical difficulties” and Coase emphasizing transaction costs as the reason that private actors do not account for all costs and benefits. Building from this emphasis on transaction costs, we identify environmental entrepreneurship as an important but underappreciated force for improving resource allocation. Entrepreneurs guide the evolution of property rights, which in turn can lower the transaction costs of using markets to solve environmental problems. We define three types of entrepreneurs—those who establish contracts over existing property rights in innovative ways, those who create new environmental property rights, and those who elicit private payments for public goods—and provide examples of how these entrepreneurs have improved resource allocation. These examples offer lessons about how government can encourage or discourage entrepreneurship.

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Terry Anderson  is president of PERC and the John and Jean De Nault Senior Fellow at the Hoover Institution, Stanford University. He believes that market approaches can be both economically sound and environmentally sensitive. His research helped launch the idea of free market environmentalism and has prompted public debate over the proper role of…

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Dominic Parker is a Senior Research Fellow at PERC and is an Assistant Professor of Agricultural and Applied Economics at University of Wisconsin-Madison where he teaches courses in natural resource economics. His research examines how legal systems and government policies affect natural resource use, environmental outcomes, and economic…

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