The Fannie and Freddie Solution for Pollution

Dave Mason / May 13, 2010

Senators Kerry and Lieberman have introduced their “compromise” climate change legislation that relies largely on a “cap and trade” scheme to reduce carbon emissions.

Even assuming there was a need for carbon limits, the Kerry-Lieberman bill gets the mechanism all wrong, apparently because the Senators either don’t understand or don’t trust markets.  Kerry and Lieberman propose that the government manage a carbon market because controlling pollution is really important.  This will work about as well as the government running grocery stores because everyone needs food.

The insight underlying the use of market mechanisms to achieve public goods (such as reducing pollution) is the Coase Theorem , developed by Nobel Economics laureate Ronald Coase.  The theory holds that private actors will find optimal uses and costs so long as property rights are transferable and transaction costs are eliminated.

In other words, to make it work, the government has to define property rights and then get out of the way and trust the market. (more…)