Economics of Pollution

In the list of the world’s top polluted cities majority are from India. India’s capital New Delhi is again in the grips of very hazardous pollution. Delhi government has shutdown schools, I have no idea how shutting down schools will stop or lessen pollution or keep children healthy but that is a question for some other time, and they are also thinking of imposing a climate change lockdown in the city!

To understand what is causing this pollution we need to understand what are the different sources of pollution. Once we know these sources, we can figure out who is responsible for those sources. Below I am going to list down the major sources of pollution. 

  1. Vehicle pollution 
  2. Factories 
  3. Urbanization and 
  4. Population growth and poverty 

Who’s responsible for all these sources? Let us see that now. 

Vehicle pollution 

The Indian central bank RBI is mainly responsible for vehicular pollution. I am sure my readers will be asking me a question in their minds: how is RBI responsible for vehicular pollution? Let me explain. There are more vehicles on Indian roads because more people are buying vehicles. Why are more people buying vehicles? Where are they getting money to buy these costly vehicles? Although there is no systematic data available on the mode of vehicle purchase by Indian customers, arguably almost 90% of all vehicles must be purchased on loan, i.e., borrowed money, by the Indian consumers. According to latest RBI data, 

outstanding vehicle loans with banks hit a new high of Rs 2,39,400 crore in FY21 up to Feb 26, which is an increase of 8.5% from Rs 2,20,600 crore at the end of FY20.

Incremental growth in auto loans at Rs 18,800 crore in the first eleven months of FY21 was higher than loan book growth in other financial years except for FY18 when auto loans grew by Rs 19,300 crore. It was Rs 17,600 crore in FY17, Rs 12,400 crore in FY19, and Rs 18,400 crore in FY20. 

Purchasing a vehicle on loan means Indians are buying cars and scooters even when they do not have money for it. This consumption boom in the auto sector is because of RBI’s cheap money policy. Under the pretense of its growth mandate RBI keeps market interest rates artificially lower from what they will be in a free market. Such artificially low interest rate fuels the unsustainable boom and squanders society’s resources. Because of these cheap loans there are more vehicles on Indian roads, and more vehicles means more pollution. 

What is the solution? The solution is simple: we must first pressure the RBI, and its owner the government, to stop its cheap money policy and let the market determine the interest rates for all sectors. Finally we must dismantle the RBI so that it can never manipulate interest rates and distort the economy. Once the cheap money policy ends, with it will end the auto sector boom. That will reduce the number of vehicles on Indian roads reducing pollution immediately. Private companies can provide community transport services where a less number of vehicles can carry more passengers, again reducing pollution. 

Factory pollution

Government argues that factories are needed for growth and development. Most people will also believe that they are an outgrowth of the capitalist system, which is frequently alleged by the climate change activists. But is capitalism responsible for this growth of pollution belching factories? Not really. On the contrary, governments are responsible for not only their existence but their existence in the vicinity of urban areas e.g., when I was growing up in the Surat city in the 70s and 80s there was little to no pollution, but then the government of Gujarat decided to industrialize the city and it started giving its land to big industries in Hazara and Pandesara area which are now major pollution hubs of Surat city. India is a socialist country where every piece of land is owned by the government. Politicians give land away to their cronies to make money and stay in power. This corruption results in pollution. The institution of socialism and its public property regime is the root cause of pollution. Pollution belching factories are a result of this state socialism  and not capitalism, which is completely missing from India since time immemorial. 

If state socialism and its public property system is the root cause of pollution then removal of socialism and institutionalizing the regime of private property rights is the solution of this pollution. As Murray Rothbard explained, 

… only private property rights will insure the end of pollution … (For a New Liberty, p. 318) 

… when we peel away the confusions and the unsound philosophy of the modern ecologists, we find an important bedrock case against the existing system; but the case turns out to be not against capitalism, private property, growth, or technology per se. It is a case against the failure of government to allow and to defend the rights of private property against invasion. If property rights were to be defended fully, against private and governmental invasion alike, we would find here, as in other areas of our economy and society, that private enterprise and modern technology would come to mankind not as a curse but as its salvation. (For a New Liberty, p. 327)


If we see the list of top 10 most polluted areas in the world then all of them are urban centers like New Delhi or Shanghai etc. Pollution is basically an urban phenomenon. We now need to inquire, what is the cause of this rapid urbanization around the world? The literature of development economics has the answer: urban bias. Urban bias theory states that, 

… urban classes in poorer countries use their social power to bias (distort) a range of public policies against members of the rural classes. Lipton maintains that urban bias “involves (a) an allocation, to persons or organizations located in towns, of shares of resources so large as to be inefficient and inequitable, or (b) a disposition among the powerful [urban classes] to allocate resources in this way” (source)

As all the investment and development is focused on urban areas, people are forced to leave villages and migrate to cities to live in filthy and polluted environments. Increasing urbanization puts immense pressure on the local government which fails, as usual, to manage the city. As we can see, here also it is the government and its policies that are responsible for urbanization and resulting pollution. Theorists, policy makers, and the activists frequently ignore this fact. They blame urban rich people for distorting a range of public policies but easily ignore the fact that urban rich became rich because of politicians favoring them in the first place, so blaming them is like putting the cart before the horse. And some group of people can distort the public policies because there are public policies in the first place! If the society is private where there is no government interference in the economy and society, then there is no institution of the state for the urban rich to become rich and then hijack its policies! 

Population growth and poverty

Population growth and poverty are also blamed for increasing pollution. Here also government is to be blamed for both problems. My readers will ask, how come the government is responsible for population growth? This is how: by subsidizing the poor, government encourages them to have more babies. When the cost of rearing your child is born by tax payers you sure are not going to be careful about how many to have. The incentive is to produce more babies. The welfare state thus encourages higher population growth rates. Poverty is also caused by government socialism. As Murray Rothbard said, 

… violent intervention in the market and a hegemonic society tend to lead to general poverty. (Man, Economy, and State with Power and Market, p. 340)


Our careful economic analysis informs us that the government is responsible for the problem of pollution. If we want to eradicate pollution then we have to eradicate the government monopoly of our economies and societies. Instead of that, people around the world have put their governments incharge of controlling pollution! This is like appointing a fox incharge of the hen house. The statist socialist system that produces pollution can never remove that very same pollution. Only removal of statist socialism can clean our environment and heal our mother Earth. 

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