Considering the fact that neo-classical economics envisions four market types: monopoly, monopolistic competition, oligopoly and perfect competition and that only under perfect competition can the tenets of neo-classical approaches work best, it would be fair to say that neo-classicalists often fall short as far as issues of environmental economics are concerned since the very definition of property rights and the means to enforce them is at the heart of solving environmental issues (Reisman, 1996). The main criticism against neo-classicalists is that they expect the government to intervene because their models are based on situations that do not achieve the ideal of perfect competition as well as clearly defined property rights which is needed for perfect competition (Rothbard, 1982).
More on this later, and at the moment let us consider the Austrian Approach to economics. Austrian Economists view the profession as the study of human action or Praxeology which is fundamentally about how individuals act with a sense of purpose to achieve chosen ends. It follows from this that the ultimate end of human action is the fulfilment of the desires (in part or full) of the economic actor.
Hence, efficiency is individual goal seeking process rather than value maximizing and inefficiency arises only when the means chosen to achieve the ends are inconsistent with the desired goal. To elaborate further, costs incurred are “the private experience of an individual [is] the sole foundation of factual knowledge” and hence are subjective (Rothbard, 1982). The next axiom of the Austrian Branch of Economics is that group behaviour can be reduced to the study of individuals that make up those groups and hence the interactions between individuals are studied.
This is the reason for prominent Austrian economists to reject macroeconomics and holism and this is the line taken by the famous economist, Karl Popper as well (Rothbard, 1982). The point about the Austrian school is that the theory is all about removing interpersonal conflicts. Hence, the overriding emphasis on studying individual behaviour rather than group behaviour and the solutions that are offered by the Austrian school are likewise more market based than the neo-classicalists since the former hold that the market if left alone can solve most of the economic issues.
Given this introduction to the two schools of economics, it would be pertinent to start the discussion about pollution externalities before contrasting the two approaches.
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