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The economics of the market place for conservation measures

By Kevin Cox - posted Tuesday, 20 July 2004

Markets work on the basis that the cost of production largely determines the cost of the goods or service. That is, if a product can be produced cheaply it can be sold cheaply. With a large number of suppliers then the most efficient producers will win market share because – everything else being equal – their prices will be lower and hence more attractive to consumers.

The difficulty with this approach is that it does not take into account other factors. Water consumption, energy generation, and the provision of telecommunications facilities are cases where the market does not work its magic because the socially desirable result is not efficiency of delivery alone.

With water we do not want the cheapest supply of water because that increases consumption and we want to reduce total consumption.


With energy we do not want the cheapest energy but we want the cheapest energy with the lowest greenhouse gas emissions.

With telecommunications we do not want the cheapest product but we want infrastructure available to all so that the products that use the infrastructure can compete on an equal basis.

The traditional approach to bringing in other factors has been regulations such as water restrictions, taxes related to an undesirable outcome such as a carbon tax, or fines for abuse of market power.

All these approaches are at best palliatives and at worse compound the problem. We need a system that works with the market and helps magnify market forces.

The principle of Conservation Market Place economics is to increase the cost of undesirable methods and outcomes and to distribute the increase so that desirable methods or outcomes have lower prices.

This doubles the effect of price signals. The trick is to find cost-effective ways to implement such systems.


Reducing water consumption is easy. All consumers are allocated an amount of water that they can buy at a particular price. If they consume more than that allocation they are charged more. If they consume less they are given cash rebates obtained from the increase in prices for over-consumption. This has the advantage that consumers do nothing except work out how to conserve water.

Reducing greenhouse emissions is similarly easy. A tax is imposed on the production of greenhouse gases and this tax is distributed to the energy suppliers who produce energy with fewer greenhouse gases.

With abuse of near-monopoly power, the system is again simple. Levies are imposed according to market share and the levy is distributed to smaller suppliers.

The critical factor in all these schemes is that the increase in prices is fed back to suppliers or consumers who produce a more desirable outcome. The advantage of a cash rebate is psychological and shows people that there is value in saving. Giving a discount does not work as well. It also helps to motivate people.

Working against these schemes are authorities who impose the measures but keep the extra money as an indirect tax. The most obvious of these is an increase in water costs and fuel taxes. Less obvious are the so-called sin taxes on gambling, alcohol and tobacco. How those taxes could be used to reduce the negative effects of abuse is the topic of another article.

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About the Author

Dr Kevin Cox is an entrepreneur. Previously he has taught Information Systems in Canberra and Hong Kong and worked with computers for various multinationals in Australia, the USA and Indonesia.

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