Why are market failures the hallmark of the environmental domain ?

[Truitinator]

Hello,

I am reading this article : http://www.yale.edu/gegdialogue/docs/dia...vanova.pdf
I am struggling with this concern :

Economic theory contends that the free market can be expected to produce an efficient and welfare-enhancing level of resource use, production, consumption, and environmental protection if the prices of resources, goods, and services capture all of the social costs and benefits of their use (Anderson 1992, 1998; Panayotou 1993). However, when private costs – which are the basis for market decisions – deviate from social costs, a “market failure” will occur resulting in allocative inefficiency as well as suboptimal resource use and pollution levels. Intensified international trade and the competitiveness pressures it generates can wield deleterious impacts on environmental quality, as market failures are a hallmark of the environmental domain. Many critical resources such as water, timber, oil, fish, coal, etc. are underpriced. Ecosystem services such as flood prevention, water retention, carbon sequestration, and oxygen provision often go entirely unpriced. Because underpriced and unpriced resources are overexploited, economic actors are able to spill onto others all or part of the environmental costs they generate and environmental strains are exacerbated.

How does this work ? How does market failure lead to problems with the environment ?
Can someone explain this in more details ? Thnx a lot

[Sienna]

The basic idea is that if all the social costs were contained in the market price, then market decision-making would be good for the environment. But what causes environmental problems, he's saying, is that the market decisions don't contain all the social costs.

For example, suppose a mechanic has a shop next to the river. When he changes people's oil, he can choose between disposing of it properly, which costs $10, or dumping it in the river. So he dumps it in the river. But the costs to everybody downstream, in terms of lost fishing product, and dirty clothes, and so on, is *more than $10*.

What the article is saying, is that's an example of "market failure". The "social costs" of disposing of the oil by dumping it in the river, are not taken into account, and therefore the market fails to "allocate resources efficiently".

The problem with this theory, is that the river is not owned by a private owner - it's owned by the government. It's not a market failure, it's a government failure. If the river was owned by a private owner, he would charge accordingly.

Therefore the problem water being "underpriced" is not a market failure. it's a government failure. Fish? Same thing.

Timber. How do we know it's "underpriced"? How does the author know?

Therefore although environmentalists often allege market failures, either
a) the problem is not caused by the market, it's caused by government, e.g. water pollution, air pollution, extinction of species managed by government, and
b) their allegation that environmental resources are "underpriced" is just a bald assertion. If people don't value it much, then it's correctly valued at a low price.