Non-Scalar Economy: An Incentive-Based Approach for Managing Pollution and Attaining Economic Sustainability
In the current economy, the cost of damage to the environment is often external, which is likely to lead to over-exploitation and inadequate provisioning. There are a variety of incentive-based schemes, such as effluent taxes or tradable permits, which attempt to confront the polluting agents with a ‘price’ equal to the marginal external cost of their activity. However, competitive incentives alone are not adequate for effective management of the shared resources. Thus, the current solutions exhibit several drawbacks including susceptibility to international free-riding, sensitivity to accurate estimation of cost of pollution or environmental targets, and inability to take the cumulative nature of pollution and its cost into account. This paper proposes an approach to eliminate the commons dilemma by using non-scalar numbers for the underlying economic signals. Rather than adding the cost of pollution to the cost of private resources, this cost is kept in a separate dimension represented by the second component of money and price. This separation enables us to develop more effective models for economic signals and incentives, and avoid the above-mentioned drawbacks. In the proposed design, the cost of pollution is cumulative and would have a progressively higher economic impact on both the competitive and cooperative incentives for managing pollution leading to a provable sustainable point. Moreover, the proposed model does not suffer from the free rider problem; does not require accurate estimation of the true cost of pollution; is simple to implement and backward compatible with the current economy.
This conference paper was originally published as Safaei, Non-Scalar Economy: An Incentive-Based Approach for Managing Pollution and Attaining Economic Sustainability, in Proceedings of Australia New Zealand Society for Ecological Economics Conference, AZSEE 2007, Sunshine Coast, Australia, 3 – 6 July 2007, (pp. 1-21), ANZEE Website: ANZEE.