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Free Market Economics Concepts Post-Legislation

We have looked at a very basic overview of free market economics, but this sets the scene for the impact of legislation.

Effectively, this implies:

  1. the supply decision of sellers
  2. consumer decisions
  3. integrating supplier and consumer considerations in the marketplace

However, there is another point to consider, as follows (see point d and figure 1.4):

  1. integrating the effect of legislation for environmental considerations

Figure 1.4: Rising demand of goods/services

Demand for quantity versus price legislation graph

Image source: University of Derby (2022)

The introduction of legislation or consumer pressure to consider the environmental impact of production changes the equilibrium point. The extra constraint is to account for the environmental quality.

Key drivers:

  1. every company is looking to provide goods or services at the minimum cost to them
  2. environmental concerns (legislation) will almost always add cost to a good or service

So, companies are trying to find an equilibrium point where the maximum environmental benefit is achieved (compliance with legislation) for the least additional cost. Sometimes, the additional cost is mandated by legislation, so, for example, you are not allowed to put polluted water into a river. Therefore, you must process the water before it goes into the river. You could do the minimum processing or you could do additional processing. You will not do additional processing because it costs you money, unless, of course, there is some other additional benefit to cleaning the water further beyond just the environmental impact. Sometimes, this can be a marketing element where you make the point that your company is trying to improve the environment.

We can consider this as:

Optimal environmental quality
Minimum of the total cost curve

Another way of looking at this is:

Expenses of environmental protection
Savings obtained by decreasing the overall environmental damage

In this case, the savings are those considered by the legislative structure.

Activity 1.1: Who pays?

Whose responsibility is it to pay for environmental costing and who pays for an energy-efficient, cleaner environment? Are there other factors which are not considered in your opinion?

How do you view the relationship between free market economics and environmental impact? As an example, you may like to consider initiatives such as levies on driving old cars – which directly affect consumers. Can you think of any examples from other areas and industries?