2. The government regulatory framework: restrictions and incentives for market participants
If economic activity in the markets proves to be incompatible with the common good, the regulatory framework must be amended in such a way that the pursuit of individual gain is once again compatible with the common good. To this end, the state’s regulatory framework provides for:
- either restrictions that limit entrepreneurial freedom,
- and/or positive incentives for environmentally and socially sustainable economic activity.
In the case of negative externalities arising from economic activity, the state could, for example, ensure that the costs of environmental damage are internalised by those who cause them. The allocation of costs in accordance with the ‘polluter pays’ principle can be considered from an ethical perspective as a principle of distributive justice.
Sometimes policymakers would be well advised not only to regulate markets but also to establish new markets in order to harness them for the common good. The market for CO₂ emission allowances is an example of this. Goods that were once free of charge are now assigned a price, thereby becoming scarce resources. This price acts as an effective incentive to manage these resources wisely and to stop wasting them needlessly. This is efficient environmental protection achieved through economic means.
Yet ‘government failure’ is just as much a myth as ‘market failure’.
Didactic Principles
- Market
- Governmental Framework
- Companies & Associations
- Economic citizens
- The public and NGOs