No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Six: Applications in Markets 142 of fortunes with a period of lower prices. Speculators that forecast incorrectly will see losses, while those that forecast correctly will be rewarded. It’s important to note that for every trade (speculative or otherwise) there is a person taking the opposite position—for every buyer there is a seller. So some speculators are correct while others must be wrong. For another review of the economic role of speculation, watch this video: MORE MARKET LIMITATIONS: POORLY DEFINED PROPERTY RIGHTS STEWARDS OF CREATION There are many ills in a fallen world, and high on many people’s list is concern over destruction of the environment. The conventional wisdom is that people are shortsighted and will not take care of the environment in the absence of strong environmental legislation and regulation. As Christians, we certainly understand that man is capable of monstrous wrongs, and certainly, concern over pollution is warranted. We need to be good stewards of God’s creation (Genesis 1:27-28, 2:15) , and bequeath to future generations a bountiful inheritance (Proverbs 13:22) . In some cases, markets may not lead to efficient allocation of resources because property rights are not completely defined. For instance, pollution is more common if the resource being polluted doesn’t have clearly defined property rights. Given this, the question becomes: what is the most effective way of providing incentives for people to do the right thing—either carrots or sticks? Critics of free markets believe “sticks” aimed at regulating behavior are the most effective, since the markets can reward poor stewardship with short-term profits. Market advocates focus on just the opposite: the market actually incentivizes long-term stewardship of assets since poor stewardship reduces capital values. When property rights are poorly defined, individual market participants will not effectively exercise good stewardship of the gifts God has given us. Let’s consider air pollution. Who owns the air? We all do…and none of us do. If I decide to burn trash, and you as my next-door neighbor are trying to have a backyard cookout, you may object to my use of the air in my yard since it affects the air in your yard. In economic terms, I will have created a negative-externality (we’ll explore this later in chapter 13) that affects you. But if you had defined property rights to clean air over your house, you could have legal redress whenever I burned trash and sent smoke your way. Negative-externality: a cost imposed on others that are not part of a market transaction. Speculation