E C O N O M I C R E P O R T O F T H E P R E S I D E N T

C H A P T E R 7Making Markets Work for the EnvironmentHulton Getty /Liaison AgencyIn 1900, one of the most common environmental problems confronting cities was theaccumulation of horse manure on streets, giving offense to sight and smell and posing apublic health hazard. Although the automobile eventually solved this problem, it causedothers. Economic growth, structural change, and technological change over the past centurygave rise to new environmental problems but also provided the income and know-howneeded to address them. Innovative efforts to remedy these problems through market-basedincentives help achieve environmental goals cost-effectively and provide lessons to guideefforts to solve the world’s potentially most significant environmental challenge in the 21stcentury: global climate change.Economic growth brings abundant benefits but can also unleash a wide arrayof environmental problems. Some, like water pollution, air pollution, andsoil contamination, are by now long-familiar afflictions; others, like changes inthe earth’s atmosphere and climate, are of more recent onset. All must be dealtwith, or else the very foundation of growth is threatened. Fortunately the sameeconomic growth, structural change, and technological change that gave rise tothese problems also provide the income and the know-how needed to addressthem. An economy that is healthy and thriving is better able to combatenvironmental ills. The challenge in addressing environmental problems lies inharnessing and channeling the power of markets, so that they both delivercontinued economic growth and foster sound environmental practices.239