Miriam Scheel, Chapter 2, Question 4

A main point of this chapter is to solve problems of market failure by getting the "insentives right". When a third party benefits from it without contributing to it, or the other way around, that third party pays the cost, a market doesn't work as it is supposed to. Some individuals may take higher risks because if they fail it is not them who will carry the entire cost; some may not do what would be considered best because their own benefit would be too low. In manny of these cases a solution could be reached by giving these indivuals insentives to do what would be best for society. If doing the best for society is also doing the best for yourself why wouldn't you do the best for society? 

An example Wheelan gives is the fish market: right now the fish is public property and every fisher wants to fish as mutch as they can because it is neither helping themselfs (less fish means less money) nor helping the fish population (if they don't kill the fish the fisherman after them is going to). The fishermen have no reason to care for the preservation of the fish. The result is overfishing the sea and reduction of the population. (And the government is not helping the case by keeping the fishermen in their business who would have to quit without the subsidies)

 

But a solution does exist. In the lobstering community of Port Lincoln licenses where sold: one license per trap that can be layed out. That does not only limit the amount of traps that are in use, but also provides the lobstermen with the right insentives to take care of the lobster population by enabling them to resell their licenses. That works because the value of the license is directly connected to the profit that can be made by using the traps. If you can make a lot of money selling the manny lobsters you caught, you pay more money to get the license to do so; if the lobster population in this area is so small that not manny lobsters can be caught with one trap, you are less likely to make a lot of money in that business, and therefor less likely to pay a lot of money to go into that business. The lobstermen now want to preserve the lobster so that the licenses they have now will be worth as much as possible when they want to sell them in the future.