Saving endangered species. Protecting clean water from polluters. Recycling trash. Cleaning the air. Preserving old-growth trees. Environmental issues have a strong moral imperative and elicit strong feelings. How does economics, with its emphases on choice and resource use, fit into the environmental perspective?

For many individuals, it doesn't fit well at all. After all, economics emphasizes change, commerce, and growth, while environmental protection emphasizes conservation, recycling, and sustainability. The two appear to be intellectual foes—lobbying for the hearts and minds of the general public and offering very different visions of the future.

But the differences are not as dramatic as they first appear: Economic reasoning can help individuals interested in accomplishing environmental goals. It can help citizens understand why environmental damage takes place, and it can provide practical solutions to environmental problems.

The tragedy of the commons

What can economics bring to the study of environmental protection? First, it adds a realistic perspective on how human beings work together to accomplish goals. In addition, it forces people to rethink romantic notions that hamper solutions. One such notion is that if no one owned the environment and everyone shared in it equally, then the environment would be in harmony.

This view, which drives many current policy decisions, is captured in the idea of the commons. In practice, parks, wilderness areas, fishing holes, lakes, and pastures that are open to use by everyone—as a commons—tend to be over-used and abused.

How does economic reasoning explain this difference between how people want the commons to work and what actually takes place in a commons? Economics relies upon the concept of incentives to explain human decisions. Incentives are the costs or benefits people expect to encounter as a result of their decisions. The costs or benefits can be monetary or nonmonetary. As the incentives change in a given situation, they tend to have a predictable influence on the decisions people make.

Consider the case of people choosing whether or not to pay a monetary price to attend a concert in a beautiful park. The cost is monetary. This cost will discourage some people from attending—perhaps those who are indif- ferent to the music being played. Those who choose to attend anticipate that the benefit (nonmonetary) of listening to the concert in a beautiful setting will more than compensate for the monetary cost. In this way, incentives help ration who will use the environment at that time. Over-use and under-use are both discouraged.

Compare that outcome to a situation in which the concert is free and open to the public. More people would come. Overcrowding would be more likely to occur. Many people in attendance might not be interested in the music. Their activities might be distracting to the listening pleasure of the music fans.

In using commons areas, people are influenced by the rules of the commons. Commons rules provide no incentives to reward the people who conserve the commons or limit its use. No fisher is rewarded for letting a fish pass in an ocean commons without netting it. No rancher is rewarded for not grazing on common lands. No hiker is rewarded for not walking in an Alpine commons of meadow flowers. No wonder most environmental problems grow out of situations where a commons exists—the resource belongs to everyone. Air quality, water quality, wildlife, fish populations, ozone, oceans, rain forests, endangered species, acid rain—all of these issues arise from the commons.

Why doesn't the commons protect the environment? An economist would reply that the commons solution does not address the problem of scarcity. The solution assumes there are no trade-offs over resource use and no conflicts among users over how to take care of the resource. Economic analysis suggests that scarcity must be recognized, with different rules established to prevent environmental problems. At this point economics becomes helpful because it clarifies how people choose to use scarce resources to satisfy human wants. Dealing with problems of scarcity is part of the long history of intellectual contributions from economics.

The role of prices and incentives

Most environmental problems occur when people choose to treat scarce resources as if they were not scarce. A scarce resource is easily recognizable because it has more than one valuable use. A tree can be used for shade, to help create a canopy in a forest environment, and to create lumber for shelter. A river or stream can serve as a habitat for wildlife or a waste disposal outlet for a community.

Unfortunately, a scarce resource cannot be used for all such purposes. A choice must be made, and every choice includes the decision to sacrifice one use for another. A shade tree cannot provide lumber; a waste disposal stream will not support fish habitat.

In the economy, the use of scarce resources is established by setting limits on resource use and by making people pay a price for the privilege of using a resource. This price limits its use and compensates a producer for the cost of production.

As an example, compare the behavior of chicken farmers to fishers. Chicken farmers do not destroy the species they grow, even though millions of chickens are killed each year. Nor do they allow the chicken's habitat to be destroyed. Fishing behavior around the world is just the opposite. Fisheries have declining fish populations because the fishers are overfishing the stock and taking immature fish before they can reproduce. In addition, habitat where fish reproduce is being destroyed.

Why does this behavior continue? Because people are treating the resource as if it was not scarce. The fish belong only to those who harvest them. Killing the fish makes the fish harvest a valuable item to sell, but fishers do not bear a direct cost for limiting the future population of the fish. Destroying fish habitat allows people to create electricity, new homes, golf courses, and areas for water recreation, but these changes do not require anybody to pay a cost for reducing fish populations.

Can you imagine the damages a developer would have to pay if he or she built a golf course on the land where a chicken farmer raised chickens? It could not be done unless the chicken farmer was compensated.

If pollution problems are the result of treating scarce goods as not scarce, how can this behavior be changed? Incentives must change so that people understand the true costs and benefits of their action in respect to the environment. For example, monetary prices can be put to environment-friendly uses. National parks and wilderness areas are very inexpensive to use. They also suffer from over-use. They are being loved to death. The cost of using these areas could be raised until the total number of people using the area was closer to an environment-friendly level of visitors.

Pollution caused by high levels of traffic on our freeways could be reduced by imposing a toll on cars using freeways during popular time periods. Right now there is no charge for people to use the freeway during its busiest time. A price of $0 encourages over-use, which is environmentally unfriendly. Tolls would discourage some from using the freeways during rush hours. Tolls also would provide those people willing to pay the price an opportunity to move along quickly, without delay. In this way, tolls would reduce air pollution from cars creeping along the freeway bumper-to-bumper.

Consider also that monetary rewards could be used to make people more wildlife-friendly. We could decide collectively to provide property owners with financial assistance if they used part of their land to create habitat for endangered species. Farmers could be induced to use less water for irrigation if they were paid not to use the water. In this way more water could be left in the rivers and streams to allow fish populations to thrive.

Individual Fishing Quotas (IFQ) are used in New Zealand and Alaska to limit fishing pressure. Fishers are allowed to purchase the right to catch a set amount of fish. That amount is their IFQ. The cost of the IFQ reduces the total number of fishers. It also encourages fishers to monitor other boats to be sure that no boat is catching too many fish.

In conclusion, economic reasoning suggests that environmental problems often arise from situations in which resources are not treated as scarce. If the incentives were changed so that people treated resources as scarce, resource-users would behave in a more environment-friendly manner, allowing us all to enjoy forever the gifts Mother Nature has provided.