Environmental markets are set to become an increasingly important instrument for regulating climate change, pollution, fishing, water usage, and land use. It is thus immensely important to draw lessons of the experience we have with this policy instrument so far. In this book, two of our leading scholars on environmental markets are offering a thorough advocacy of this policy instrument. Based on the reasoning of Coase (1960), lessons from Ostrom (1990), and a large number of case studies, Anderson and Libecap argue that many environmental problems should not be seen as market failures, but as missing markets, and that the natural and cost-effective solution is to establish the missing market. In essence, an environmental market is defined by a set of property rights that are enforced and a marketplace where buyers and sellers can trade these rights. The job of the government is thus to define the property rights, enforce them, and facilitate market exchange by providing information, harmonizing measurement, verification, and by establishing a way for buyers and sellers to easily find each other. Without such governmental support, the transaction costs can be high and the cost-savings from trade reduced.
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