Toward a theory of sustainable entrepreneurship: Reducing environmental degradation through entrepreneurial action

Abstract

This article explains how entrepreneurship can help resolve the environmental problems of global socio-economic systems. Environmental economics concludes that environmental degradation results from the failure of markets, whereas the entrepreneurship literature argues that opportunities are inherent in market failure. A synthesis of these literatures suggests that environmentally relevant market failures represent opportunities for achieving profitability while simultaneously reducing environmentally degrading economic behaviors. It also implies conceptualizations of sustainable and environmental entrepreneurship which detail how entrepreneurs seize the opportunities that are inherent in environmentally relevant market failures. Finally, the article examines the ability of the proposed theoretical framework to transcend its environmental context and provide insight into expanding the domain of the study of entrepreneurship.

Full text

Toward a theory of sustainable entrepreneurship:
Reducing environmental degradation through
entrepreneurial action
Thomas J. Dean
a,
*, Jeffery S. McMullen
b,1
a
University of Colorado at Boulder, Leeds School of Business, CB 419 Boulder, CO 80309-0419, United States
b
Baylor University, Hankamer School of Business, PO Box 98006 Waco, TX 76798-8006, United States
Received 1 March 2005; received in revised form 1 August 2005; accepted 1 September 2005
Abstract
This article explains how entrepreneurship can help resolve the environmental problems of global
socio-economic systems. Environmental economics concludes that environmental degradation
results from the failure of markets, whereas the entrepreneurship literature argues that opportunities
are inherent in market failure. A synthesis of these literatures suggests that environmentally relevant
market failures represent opportunities for achieving profitability while simultaneously reducing
environmentally degrading economic behaviors. It also implies conceptualizations of sustainable and
environmental entrepreneurship which detail how entrepreneurs seize the opportunities that are
inherent in environmentally relevant market failures. Finally, the article examines the ability of the
proposed theoretical framework to transcend its environmental context and provide insight into
expanding the domain of the study of entrepreneurship.
D2005 Elsevier Inc. All rights reserved.
Keywords: Entrepreneurship; Opportunity; Market failure; Environment; Sustainability
For far-sighted companies, the environment may turn out to be the biggest
opportunity for enterprise and invention the industrial world has ever seen.
The Economist.
0883-9026/$ - see front matter D2005 Elsevier Inc. All rights reserved.
doi:10.1016/j.jbusvent.2005.09.003
* Corresponding author. Tel.: +1 303 492 3282; fax: +1 303 492 5962.
E-mail addresses: deantj@colorado.edu (T.J. Dean)8Jeffery_McMullen@Baylor.edu (J.S. McMullen).
1
Tel.: +1 254 710 6197; fax: +1 254 710 1093.
Journal of Business Venturing 22 (2007) 50 – 76

1. Executive summary
Despite extensive economic growth and increases in the quality of life over the last
century, concern remains that the era of industrialization has had substantial negative
effects on the natural environment and that these effects diminish the vitality and
sustainability of our economic systems (Boulding, 1966; Ehrlich, 1968; Schmidheiny,
1992; United Nations, 1987; World Resources Institute, 2004). In addition to the
localized problems of air pollution, surface–water degradation, and toxic wastes in
groundwater, recent scientific discoveries have revealed global scale effects such as
ozone depletion, climate change, and the worldwide destruction of ocean fisheries
(World Resources Institute, 2004; United Nations, 1999, 2004). The long-term economic
impacts of these effects may be quite substantial as a large portion of the world’s
economic output is dependent upon the viability of natural systems (Costanza et al.,
1997).
The role of entrepreneurship in resolving such environmental challenges is emerging as
a subject of some debate. Traditional theory from environmental and welfare economics
largely concludes that the market failures inherent in the economic system prevent
entrepreneurial action from resolving environmental problems and indeed often motivate
environmentally degrading entrepreneurial behaviors (Pigou, 1932; Tietenberg, 2000;
Cropper and Oates, 1992; Bator, 1958). In contrast, some authors promote entrepreneur-
ship as a means of resolving market failure problems (Coase, 1974; Buchanan and Faith,
1981; North and Thomas, 1970; Demsetz, 1970) and, more specifically, environmental
issues (e.g., Anderson and Leal, 1997, 2001).
Synthesizing theory from the entrepreneurship, environmental and welfare economics
literatures, we develop a conception of environmental entrepreneurship as a subset of the
broader concept of sustainable entrepreneurship and outline the means by which
entrepreneurial action can resolve environmental challenges by overcoming barriers to
the efficient functioning of markets for environmental resources. We argue that the
growing desire of many individuals in the marketplace for the cessation of environmen-
tally degrading activities, combined with a willingness to pay for reduction of these
activities, represents opportunity for entrepreneurial action that can lead to the
enhancement of ecological sustainability. This conception of sustainable entrepreneurship
differs substantially from explorations of social entrepreneurship (Dees, 2001; Mort et al.,
2003) which tend to address mission-driven, rather than profit-driven entrepreneurial
endeavors. Regardless of its mission, the sustainable entrepreneurship we discuss is
defined by its alleviation of environmentally relevant market failures through the
exploitation of potentially profitable opportunities. Therefore, we seek to address the
environmentally relevant subclass of sustainable entrepreneurship which is typically
understood as meeting bthe needs of the present without compromising the ability of future
generations to meet their own needsQ(United Nations, 1987). Consequently, our intention
is to begin the process of understanding the concept and domain of sustainable
entrepreneurship through more specific theoretical development of the concept of
environmental entrepreneurship, offering conceptual precision in developing a theoretical
explanation for why environmental problems arise and persist and how sustainable
entrepreneurship can reduce or eliminate them.
T.J. Dean, J.S. McMullen / Journal of Business Venturing 22 (2007) 50–76 51

Review of the literature on the five categories of market failure that we address in our
analysis (public goods, externalities, monopoly power, inappropriate government
intervention, and imperfect information) suggests that the key to achieving sustainable
and environmental entrepreneurship lies in overcoming barriers to the efficient functioning
of markets for environmental resources. Because of the unique characteristics of many
environmental resources, they do not tend to be easily amenable to market allocation.
Environmental entrepreneurs create and improve markets for such resources through
entrepreneurial action that results in the development of property rights and economic
institutions, the reduction of transaction costs, the dissemination of information, and the
motivation of government action. Through the resulting development of markets,
entrepreneurs can profit from the economic value created while reducing environmental
degradation and enhancing ecological sustainability.
We suggest that the magnitude of potential opportunities for sustainable entrepreneurship
corresponds to the level of degradation of economically valuable environmental resources.
Both increasing evidence of substantive environmental degradation and recent market
developments in renewable energy, fuel cells, green building, natural foods, carbon
emissions, and other sectors suggest an increasing importance of opportunities for
environmental entrepreneurship. In addition, although it was not the initial intent of our
manuscript, our synthesis of the market failure and entrepreneurship literatures suggests a
substantial expansion of the scope of the entrepreneurship domain. Because our market
failure perspective reveals a greater variety of barriers to the efficient function of markets
than that addressed in the Austrian view, it implies additional types of entrepreneurs including
the Coasian, institutional, market appropriating, political, and informational entrepreneurs.
2. Introduction
Traditional theory from environmental and welfare economics largely concludes that
market failures within the economic system not only prevent entrepreneurial action from
resolving environmental problems but actually motivate environmentally degrading
entrepreneurial behaviors (Dorfman, 1993; Pigou, 1932; Tietenberg, 2000; Bator, 1958).
More specifically, this literature states that, because of the unique characteristics of many
environmental resources, certain obstructions to their efficient allocation in the market
system exist, and, as a result, entrepreneurial action will not protect and preserve valuable
environmental resources (Dorfman, 1993). From a practical perspective, this argument has
led to policy that focuses on regulatory intervention as the primary solution to
environmentally relevant market failures and has created a general lack of knowledge
about the means by which entrepreneurs can help solve environmental challenges (Pigou,
1932; Dorfman, 1993). Unfortunately, the entrepreneurship literature has been of little help
in addressing this issue. Despite the fact that the entrepreneurship literature directly
addresses the market-equilibrating exploitation of market gaps, imperfections, and failures
(Leibenstein, 1968, Kirzner, 1973, 1985; Shane and Venkataraman, 2000; Dean and
McMullen, 2002; Eckhardt and Shane, 2003), it has yet to address how entrepreneurs can
overcome environmentally relevant market failures and how the exploitation of these
opportunities might decrease environmental degradation.
T.J. Dean, J.S. McMullen / Journal of Business Venturing 22 (2007) 50–7652

The purpose of this article is to demonstrate how entrepreneurship can help resolve
environmental problems through the exploitation of opportunities inherent in environ-
mentally relevant market failures and thereby help move global economic systems toward
sustainability. Synthesizing theory from environmental and welfare economics with that of
the entrepreneurship literature, we propose that the growing desire of market actors for the
cessation of environmentally degrading activities represents opportunity for entrepreneur-
ial action and that exploitation of these opportunities by entrepreneurs can lead to the
enhancement of ecological sustainability. Whereas the welfare and environmental
economics literature brings an understanding of the nature of market failures and the
obstructions that produce them, the entrepreneurship literature suggests why these
obstructions represent opportunities and how entrepreneurs overcome them. Thus, we seek
to delineate the concept of environmental entrepreneurship and the more general term,
sustainable entrepreneurship, and demonstrate the means by which entrepreneurial actors
can achieve economic returns by exploiting environmentally relevant market failures. To
the extent that entrepreneurs find innovative means of overcoming the barriers to the
efficient functioning of markets, they can surmount the market failures that are responsible
for environmental problems and help to alleviate these important economic challenges.
Such a synthesis of the entrepreneurship and environmental economics literatures
makes a number of important contributions to the field of entrepreneurship. First, it reveals
the presence of entrepreneurial opportunities in environmentally relevant market failures
and correlates those opportunities to the magnitude of environmental problems or, at least,
the economic value lost due to environmental degradation. Second, it provides specific
knowledge about the means by which entrepreneurs overcome environmentally relevant
market failure problems and are thereby able to exploit the economic opportunities they
represent. Third, understanding the role that environmentally relevant market failures play
in creating opportunities brings us closer to a theory of sustainable entrepreneurship which
addresses more broadly the role entrepreneurs can play in creating a more socially and
environmentally sustainable economy. Fourth, it suggests a less deterministic and more
proactive role of entrepreneurs in developing the economic institutions that are necessary
to overcome market failures. In this regard, our theoretical analysis suggests both that
entrepreneurial action helps to motivate the development of economic institutions
necessary for markets to function and that restrictive government intervention may be
inferior to symbiotic actions that establish property rights regimes or otherwise enable
markets for environmental resources.
Perhaps most importantly, the application of the environmental economics literature to
entrepreneurship broadens our perception of the domain of the entrepreneurship field.
Because the Austrian perspective focuses exclusively on widespread ignorance as the
market barrier which engenders opportunity, the Austrian view limits conceptions of
entrepreneurship to those individuals and organizations that capture opportunities through
superior alertness. Our market failure perspective expands the Austrian view by
delineating additional market barriers which create alternative types of opportunities
and imply additional entrepreneurial means of exploiting them. At the broadest level, our
approach suggests that market failures and imperfections are the sea from which
opportunities are drawn and that an understanding of the scope of such failures informs the
literature about entrepreneurial opportunities and actions that go beyond those identified
T.J. Dean, J.S. McMullen / Journal of Business Venturing 22 (2007) 50–76 53

by the Austrian view. At a level specific to environmental issues, the market failure
perspective on entrepreneurship suggests that environmental problems result, not from
humans’ natural tendency to abuse the environment, but from an inadequate conception of
entrepreneurship — one which fails to recognize the effectiveness of the entrepreneurial
process in developing markets for environmental resources and preserving their value for
present and future generations.
We begin our analysis with a review of market theory, the concept of market failure,
and the role that market failure plays in environmental degradation. We then review
developments in the entrepreneurship literature which parallel some of these thoughts and
integrate them with the theory of market failure to arrive at our environmentally relevant
conception of sustainable entrepreneurship. Using five classes of market failure that appear
consistently within the literature, we then discuss the transaction obstructions that create
market failure and provide opportunities for entrepreneurial action. We highlight the
entrepreneurial actions necessary to overcome these obstructions and conclude the paper
with a consideration of the theory’s implications.
3. Theoretical development
3.1. Market theory and market failure
Market theory emerged over 120 years ago with the publication of Leon Walras’
Elements of Pure Economics (1877), which provided the underpinning for most modern
economic reasoning in the form of the general equilibrium model — a mathematical model
describing the allocation of resources, or goods, among all the consuming and producing
units in the economy. Advancement of the paradigm culminated with the introduction of the
Arrow-Debreu model (1954) and Debreu’s (1959) Theory of Value, which demonstrated
that, under certain conditions, a market will result in the efficient allocation of goods and
services through the direction of resources to their highest valued uses. These mathematical
models of general equilibrium suggest that both individual markets and several inter-related
markets can achieve a Pareto-efficient equilibrium state (Arrow and Debreu, 1954) or Pareto
efficiency — a market state in which bno redistribution of goods or productive resources can
improve the position of one individual without making at least one other individual worse
offQ(Arrow and Debreu, 1954: 265). Pareto efficiency is largely considered the benchmark
by which to judge the efficiency of markets, and markets which meet a defined set of
assumptions have been mathematically proven to live up to this ideal. Furthermore, Pareto
efficiency is often equated with a state of perfect competition in which prices are equal to
average total costs and, as a result, economic profits, or rents (profits above all costs
including a risk-adjusted return to capital), are non-existent (Scherer and Ross, 1990). In
practice, perfect competition is considered to be an ideal that is not often, if ever, attained. By
implication, this implies that the ideal state of Pareto Efficiency is also not attained.
We broadly classify the body of literature that addresses departures from Pareto efficiency
and perfect competition as the market failure literature. From the perspective of a welfare
economist, market failure means bmarkets fail to implement all the gains that can be
achieved through tradeQ(Zerbe and McCurdy, 2000: 11). Perhaps most relevant to the
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present discussion, Bator (1958) defined market failure as bthe failure of a more or less
idealized system of price-market institutions to sustain ddesirableTactivities or to stop
dundesirable activities’Q(Bator, 1958:351). Furthermore, the literature suggests that both the
complete failure of a market to arise (e.g., Akerlof, 1970), as well as the inability of an
existing market to achieve Pareto efficiency are included within the concept of market
failure.
Pigou, who is considered to be the father of welfare economics (Pressman, 1999),
provides a relatively simplistic means of understanding the market failure concept and its
effects on social welfare, particularly in terms of its effects on the natural environment
(Pigou, 1932). Pigou distinguished between the private costs of production and the social
costs of production. Private costs of production include those incurred only by the private
firm or individual producing a given good or service. Social costs include the private costs
as well as those incurred by society at large but not by the private producer. In the case of
steel production, the additional social costs not incurred by the steel producer include, for
example, such consequences as health and environmental effects of the factory’s smoke.
Pigou argued that whenever the social costs (or benefits) of production vary from the
private costs (or benefits) of production, a socially optimal allocation of resources will not
result (Pigou, 1932). For example, if a producer does not incur the full costs of production
(e.g., the health damage costs of smoke emissions from a factory on the surrounding
community), then welfare economists argue that the producer is unlikely to consider these
costs in its production function and will, consequently, produce too great a quantity of both
the factory’s product and its smoke.
3.2. Market failure and environmental degradation
Largely based on the theory of market failure, the field of environmental economics
focuses on how various types of market failure create environmental damage (Cropper and
Oates, 1992; Dorfman, 1993). Environmental economics approaches pollution primarily as
an economic problem. Many environmental assets or natural resources (such as the
atmosphere) have characteristics which make them less amenable to market allocation
(Dorfman, 1993). Consequently, the air makes a relatively poor economic good because of
its transitory and indivisible nature (Dorfman, 1993), and climate change resulting from
human emissions of greenhouse gases provides a specific illustration of this problem.
Literally, billions of individuals throughout the globe contribute to climate change on a
daily basis because of the greenhouse effect of carbon dioxide emissions (Oreskes, 2004).
From the burning of manure for cooking to the driving of automobiles, the actions of
individuals throughout the globe release carbon dioxide into the atmosphere. Although
individuals enjoy the benefits of these actions (a hot meal and more convenient travel from
point A to point B), they incur only a percentage of the costs (the effects of climate change
on societies). In such a scenario, the nature of the atmosphere prevents the market from
ensuring accountability for reductions in environmental sustainability, and environmental
degradation thereby ensues. As effects such as pollution (in its effects on surface water),
clear cutting (in its effects on the renewability of the forests), overfishing (in its effects on
the fishery) are repeated for these other valuable environmental resources, the market
process fails to ensure the sustainability of natural assets and diminishes the earth’s ability
T.J. Dean, J.S. McMullen / Journal of Business Venturing 22 (2007) 50–76 55

to provide for future generations (Dorfman, 1993; Boulding, 1966; Ehrlich, 1968;
Schmidheiny, 1992; United Nations, 1987, 1999, 2004; World Resources Institute, 2004).
The environmental economic approach to environmental problems suggests that the
elimination or correction of market failure enhances the Pareto efficiency of markets while
simultaneously reducing environmental degradation and pollution effects (Buchanan and
Faith, 1981; Demsetz, 1967; Pigou, 1932). If, for example, steel producers are required to
internalize the costs of pollution, their production function will be altered and their
decision-making will tend toward minimizing pollution and associated damages. Thus,
environmental economists are fundamentally concerned with the means of eradicating
market failure because they believe that it reduces environmental degradation and
enhances economic and ecological sustainability.
We refer to market failures which have detrimental impacts on environmental resources
as environmentally relevant. Although they are a subset of the entirety of market failures,
environmentally relevant market failures may deserve special attention because natural and
environmental resources may be particularly susceptible to overuse and abuse (Dorfman,
1993). In addition, environmentally relevant market failures detract from the sustainability
of an economic system by allowing the degradation of natural assets which are necessary
to generate future economic value, whether privately or publicly owned (Costanza et al.,
1997; Dorfman, 1993; Solow, 1993).
3.3. Market failure and entrepreneurial opportunity
The entrepreneurship literature exhibits a similar focus on market failures, but for
entirely different reasons and with somewhat different language. In discussing the link
between incomplete market conditions and entrepreneurial opportunity, several entrepre-
neurship theorists have proposed that imperfectly competitive markets imply opportunities
for entrepreneurial action and economic profit. For example, Leibenstein’s (1979) theory
of X-efficiency related market gaps and imperfections to departures from the ideal state of
perfect competition and correlated the amount of expected entrepreneurial activity to the
magnitude of those departures. Similarly,Kirzner (1985, 1997) spoke of market errors and
inefficiencies, which he attributed to a dynamic market process and the widespread
ignorance of market participants. In her treatise on the growth of the firm, Penrose (1963)
refers to binterstices in the economyQ(p. 223) that are created by changes inherent in
growing economies.
Considering these and other discussions of the sources of opportunity, Eckhardt and
Shane (2003) distinguish two important themes within the literature. The first focuses on
exogenous shocks which alter either the demand (i.e., tastes and preferences) or supply
side (i.e., new product or process technologies) of markets. The resulting changes in the
fabric of the market then produce opportunities for entrepreneurial action in the form of
Penrose’s (1963) interstices or Leibenstein’s (1979) gaps. In contrast, the second theme
focuses upon asymmetries in awareness to these market changes resulting from individual
differences in, for example, knowledge (Hayek, 1945) or alertness (Kirzner, 1973, 1985).
Consistent with a number of prominent Austrian theories of entrepreneurship (e.g.,
Kirzner, 1979), this latter argument explains the existence of opportunity and superior
profit potential primarily in terms of widespread ignorance of market conditions.
T.J. Dean, J.S. McMullen / Journal of Business Venturing 22 (2007) 50–7656

The theoretical problem of the exogenous shocks approach is that, without some barrier
(i.e., widespread ignorance) to the immediate exploitation of these gaps, they would exist
only for an instant and would not result in superior profitability for those who discover
them (Rumelt, 1987; Shane and Venkataraman, 2000). Thus, a complete theory of the
nature of entrepreneurial opportunities must include consideration of the barriers to
widespread and rapid exploitation of opportunities which arise from exogenous shocks. To
date, the discussions of the nature of such obstructions within the entrepreneurship
literature has been limited. For the most part, authors have followed Kirzner’s approach
and focused primarily upon information asymmetries across producers regarding the
nature of demand or the means of supply (Sarasvathy et al., 2003).
It is here that environmental and welfare economics and the theory of market failure can
provide some insight beyond that of Kirzner (1997) and other Austrian-based approaches
(Eckhardt and Shane, 2003; Shane and Venkataraman, 2000). Like the Austrian school,
environmental economists assume the economic system to be in a state of disequilibrium.
However, whereas Austrians view this disequilibrium as the natural order of things, which
is corrected when recognized by self-interested economic agents, environmental
economists tend to focus upon situations in which market failure persists despite potential
recognition by actors who desire its correction. The persistence of the state of market
failure is argued to be the result of certain barriers which prevent the exploitation of
opportunities.
Thus, the environmental and welfare economics literatures recognize not only the
ignorance of producers or potential producers, but other barriers that, when overcome,
allow the generation of economic rents and the movement of markets towards superior
states of equilibrium and efficiency (Buchanan and Faith, 1981; Demsetz, 1967, 1970;
Anderson and Leal, 2001). Consideration of these barriers as entrepreneurial opportunity
rests in an understanding of the more specific foundations of the theory of market failure.
Because market failure represents a departure from Pareto efficiency, the implication is
that gains to trade exist and that removal of the barriers that cause market failure will allow
entrepreneurs to seize those gains to trade.
Thus, the application of the theory of market failure to the literature on entrepreneurial
opportunity suggests that other types of barriers to the efficient functioning of markets
exist and that the understanding of these barriers enhances our knowledge of the nature of
entrepreneurial opportunities (Dean and McMullen, 2002). But most importantly for
present purposes, the combination of the conclusions of the market failure literature with
the literature on entrepreneurial opportunities provides a foundation for the concepts of
sustainable and environmental entrepreneurship.
3.4. Market failure, entrepreneurial opportunity, and sustainable and environmental
entrepreneurship
A synthesis of the literature on market failure from economics with opportunity-
oriented discussions of market imperfections and failures from the entrepreneurship
literature implies the concepts of sustainable and environmental entrepreneurship.
Whereas environmental economics concludes that environmental degradation results
from the failure of markets and the entrepreneurship literature concludes that opportunities
T.J. Dean, J.S. McMullen / Journal of Business Venturing 22 (2007) 50–76 57

are inherent in market failure, the logical conclusion is that environmentally relevant
market failures represent opportunities for simultaneously achieving profitability while
reducing environmentally degrading economic behaviors. In other words, some market
failures which result in environmental damage provide entrepreneurial opportunities
whose exploitation promises profit and improvements in social welfare. Assuming that an
environmentally relevant market failure represents a bproblemQthat people would pay to
have removed if given a cost-effective solution, an opportunity exists for prospective
entrepreneurs. Moreover, by alleviating the market failure, entrepreneurial action
contributes to environmental sustainability and social welfare as it enhances the efficiency
of markets and helps eliminate economically undesirable environmental degradation.
Thus, building on Shane and Venkataraman’s (2000) conception of entrepreneurship, we
offer the following:
Definition 1A. Environmental entrepreneurship is defined to be: the process of
discovering, evaluating, and exploiting economic opportunities that are present in
environmentally relevant market failures.
Definition 1B. Sustainable entrepreneurship is defined to be: the process of discovering,
evaluating, and exploiting economic opportunities that are present in market failures which
detract from sustainability, including those that are environmentally relevant.
Thus, environmental entrepreneurship is presented as a subset of the broader concept of
sustainable entrepreneurship, focusing on the resolution of market failures which result in
environmental degradation. Furthermore, the specification of these definitions permits us
to propose entrepreneurial action that follows logically from the existence of
environmental entrepreneurship. Accordingly,
Proposition 1. In their effort to achieve economic return, environmental entrepreneurs
enhance ecological sustainability by ameliorating environmentally relevant market
failures.
The role of entrepreneurs in resolving these environmentally relevant market failures
and moving society toward sustainability has been little explored. Although Anderson and
Leal (1997, 2001) promote a free market approach to environmental issues and discuss the
role of entrepreneurs in resolving environmental problems, our research reveals little other
theoretical work that seeks to explain how entrepreneurs influence the sustainability of the
environment. Though not addressing environmental issues directly, authors have examined
the manner in which entrepreneurs overcome market failure. For example, Buchanan and
Faith (1981) examine the role of entrepreneurs in internalizing externalities as an
alternative to political solutions to market failures. Coase (1974) describes how private
lighthouse keepers resolve public goods problems inherent in the provision of lighthouse
services by obtaining the right (from port authorities) to charge for their services at nearby
ports. Finally, North and Thomas (1970) and Demsetz (1970) discuss how entrepreneurs
encourage or institute the development of property rights regimes for personal gain, and in
that process resolve market failures. However, with the exception of Anderson and Leal
(1997, 2001) not one of these theoretical explanations addresses environmental issues
directly.
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Not only does the theory of market failure provide insight into the conception of
sustainable entrepreneurship, it also illuminates the obstructions that environmental
entrepreneurs must overcome and thereby suggests where to look for opportunities for
sustainable entrepreneurship. Historically, welfare and environmental economists have
identified five categories of market failure, including public goods, externalities,
monopoly power, inappropriate governmental intervention, and imperfect information,
which we have earlier suggested to be the basis for a typology of entrepreneurial
opportunity (Dean and McMullen, 2002). Though seemingly distinct, each category
nevertheless represents the same theoretical discrepancy between private and social costs.
However, owing to a unique blend of market conditions that lead to its emergence, each
category represents a slightly different manifestation of this discrepancy (Coase, 1960;
Randall, 1993).
Below, we use research on market failure to examine the nature of opportunities for
sustainable entrepreneurship using the five previously noted categories of market failure
that can be seen to be manifest in environment-degrading discrepancies between private
costs and social costs. Drawing from a legacy of research devoted to identifying and
describing the market conditions that are responsible for the emergence of various
categories of market failure, we seek to provide both a better understanding of the
structural barriers leading to each discrepancy and of the ways in which entrepreneurs
have overcome these obstacles to achieve personal profit while concurrently improving the
efficiency of the market and the ecology.
3.5. The nature of opportunities for environmental entrepreneurship
Historically, the literature on market failure has identified five types of market failure
(see, for example, Tietenberg, 2000). However, because no underlying theoretical
foundation exists that suggests that these categories are mutually exclusive or collectively
exhaustive, we do not argue that they create a comprehensive typology. For the purpose of
making our point that environmental degradation is in part related to an insufficiently
broad conception of entrepreneurship, however, we employ the five most common types
of market failure. Public goods, externalities, monopoly power, inappropriate govern-
mental intervention, and imperfect information each present, to a different degree,
conditions that are ripe for sustainable entrepreneurship. In the following paragraphs we
briefly discuss in a standard order: (1) the implication of each category for environmental
degradation, (2) the conditions that lead to the existence and persistence of each category
of market failure as it applies to the environment, and (3) (in the form of propositions and
examples) what environmental entrepreneurs have done or can do to overcome these
conditions to produce profitable transactions.
3.5.1. Public goods
Public goods are a particularly well-known form of market failure that may be the most
susceptible to environmental degradation and therefore possibly the most promising
opportunity for sustainable entrepreneurship. The discrepancy between private costs and
social costs that is characteristic of public goods is typically attributed to their non-
excludability, which refers to their openness to consumption by all individuals regardless
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of whether an individual has paid for such use (Cowen, 1988). Furthermore, non-
excludability results from the absence of property rights or their effective enforcement.
Non-excludability engenders overuse whenever a public good is rivalrous (one person’s
use diminishes the amount or quality of the good available to others) (Randall, 1993)
because, in the absence of property rights, each individual has an incentive to exploit a
resource as quickly as possible (Cowen, 1988). This can result in a resource-degrading
misalignment in incentives more commonly known as the btragedy of the commonsQ
(Hardin, 1968). For example, because international waters are not owned by any
individual or sovereign, too many actors in the commercial fishing industry have sought to
harvest the fisheries as quickly as possible rather than conserve the resource and maximize
output over time. This has led to damaging fishing practices, the elimination of breeding
stocks, and the rapid depletion of these resources. Other examples of public goods
currently facing similar pressures include national forests, regional air resources, and
global climate.
The problem of environmental degradation due to public goods therefore represents
unmet societal demand for a cost-effective solution and a potentially profitable opportunity
for sustainable entrepreneurship. In recognition of Nobel Prize winning economist Ronald
Coase’s study (1974) of bThe Lighthouse in EconomicsQ, we refer to entrepreneurs who
develop property rights regimes for previously non-excludable public goods as Coasian
entrepreneurs. Coasian entrepreneurs translate public goods into excludable private ones
through both political and technological mechanisms (Dean and Pacheco, 2005). Political
strategies involve motivating government agencies to implement or enforce property rights
regimes that allow the efficient functioning of a market for public goods (Goldin, 1977;
North and Thomas, 1970; Demsetz, 1970). For example, in Coase’s seminal article, he
describes how private lighthouse keepers resolved the excludability problem inherent to
lighthouse services by gaining the right from port authorities to charge incoming vessels
for the lighthouse services. In Africa, governments have had some success in protecting
elephant herds by assigning rights to the herd to local tribes who are economically
motivated to preserve the herds (Anderson and Leal, 1997). Similarly, in the western
United States, the assignment of property rights to water has allowed entrepreneurial
development of agricultural lands, reduced pollution of existing water supplies, and
enabled more efficient allocation of water to its highest valued use. In another example,
Anderson and Leal (1997), show how a local entrepreneur convinced government entities
to provide him the right to collect the roe of Montana paddlefish to sell on the caviar
market. Prior to his actions, fishermen were causing environmental harm by disposing the
eggs and the rest of the fish innards around local streams. For the right to collect the roe
(through a free fish-cleaning service) the entrepreneur agreed to give half of the net
proceeds back to the state for paddlefish research and management (Anderson and Leal,
1997). The new property rights regime helped preserve the fishery while enhancing the
economic value of that fishery for the local tourism industry.
Coasian entrepreneurs can also enable the private provision of public goods through
technological strategies that seek to transform a good from non-excludability to
excludability (Goldin, 1977). In other words, technologies can help to protect property
rights by excluding freeloaders from using public goods by allowing the enforcement of
property rights and ensuring their provision (Furubotn and Pejovich, 1972). For example,
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barbed-wire fencing allowed large landowners in the Western United States to cost-
effectively exclude mobile cattle owners from trespassing on their lands and grazing their
cattle without payment or consideration for the future productivity of the property. Hence
we propose:
Definition 2. Coasian entrepreneurship is defined to be: the process of establishing
excludability for public goods through the development and enforcement of property
rights regimes by profit-motivated economic actors.
The specification of this definition then permits us to propose entrepreneurial action
that follows logically from the existence of the Coasian entrepreneurship process.
Accordingly,
Proposition 2A. Public goods present opportunities for entrepreneurial action when
entrepreneurs can develop excludability for those goods.
Proposition 2B. Environmental entrepreneurs reduce environmental degradation and
capture economic value by developing excludability for public environmental resources.
3.5.2. Externalities
Externalities are another well-known and pervasive type of market failure that have a
substantial effect upon environmental degradation and that can create opportunities for
environmental entrepreneurs. An externality is ba cost or benefit arising from any activity
which does not accrue to the person or organization carrying on the activityQ(Black,
1997:169), or the effect of one individual’s actions on the utility of another individual
(Cowen, 1988). Externalities can also be viewed as side effects associated with market
transactions (Kahn, 1995). Positive externalities, such as the impact of one person’s
disease vaccination on the probability of another person contracting the disease, are those
actions that have a beneficial effect on another individual, while negative externalities,
such as the impact of industrial smoke on the health and environment of the surrounding
community, are those actions that have a damaging effect on another individual (Cowen,
1988). Where externalities exist, resources are not allocated efficiently because the
incentives of economic actors are misaligned, and those creating external costs may not be
incurring their consequences (Buchanan and Stubblebine, 1962).
Economic theory attributes externalities to prohibitive transaction costs (Cole, 2000;
Dahlman, 1979; Furubotn and Pejovich, 1972). In short, it is argued that, with the
exception of transaction costs and unassigned property rights (Demsetz, 1966; Sternberg,
1996), no a priori reason exists that would prevent the market from properly allocating
scarce resources. Therefore, under conditions of defined property rights, transactions to
alleviate the externality are not completed because the cost of those transactions exceeds
their benefit (Dahlman, 1979). For example, in the case of a factory that is polluting a
neighboring community, individuals may choose not to seek compensation for damages or
reduction of emissions because the transaction costs of doing so would exceed the
potential gains. Such transaction costs include the costs of proving that the emissions from
a given factory are actually causing harm (a sort of causal ambiguity), hiring legal
professionals to either write a contract or sue the creator of the externality, and bearing the
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opportunity costs associated with the time spent pursuing the issue. bTransaction costs are
therefore a necessary condition for the persistence of unwanted effects from externalities,
for with zero transaction costs side effects will be internalized and will not negatively
affect resource allocationQ(Dahlman, 1979: 142).
Environmental entrepreneurs can capture economic value and reduce environmental
degradation by reducing the transaction costs associated with environmentally relevant
externalities. This is achieved by institutional entrepreneurs (Dean and Pacheco, 2005)
who are self-interested profit-seeking actors who establish or modify institutions to reduce
transaction costs. Transaction costs bconsist of the costs of measuring the valuable
attributes of what is being exchanged and the costs of protecting rights and policing and
enforcing agreementsQ(North, 1990: 27). In other words, transaction costs represent the
costs of exchange, as opposed to the costs of production or transformation. As a result,
they are highly dependent upon institutions which act as bthe humanly devised constraints
that shape human interactionQand bstructure incentives in human exchange whether
political, social, or economicQ(North, 1990: 3). Despite the integral role of entrepreneur-
ship in institutional change, however, theory and research from both economics (e.g.,
North, 1990; Demsetz, 1970) and sociology (e.g., DiMaggio, 1988; Garud et al., 2002;
Maguire et al., 2004) has only recently begun to recognize the role of entrepreneurs in
establishing or altering institutions (North, 2005). For example, recent sociology-based
research on institutional entrepreneurship investigates how entrepreneurs develop
institutions such as technology standards and HIV/AIDS treatment advocacy to further
their own self-interest (Garud et al., 2002; Maguire et al., 2004).
This self-interest need not run counter to society’s interests (Smith, 1991). For example,
the Chicago Climate Exchange (CCX) was recently created by entrepreneur Richard
Sandor to serve as a marketplace for carbon emission credits. The exchange serves as a
platform through which members can trade carbon emission allowances, thereby enabling
firms with relatively low emission reduction costs to sell credits on the exchange to firms
with higher costs. The resulting institution has produced a reduction in the aggregate
emissions at the least possible cost by minimizing the transaction costs of carbon trading
through the development of uniform carbon commodity standards, legal instruments that
provide evidence of ownership, auditing mechanisms, and the actual trading technology
which serves as a mechanism of price discovery (Sandor, 2001). Thus, through the
entrepreneurial development of CCX, Richard Sandor, member companies, and society
have benefited from a reduction of transactions costs.
Perhaps a more familiar example of institutional entrepreneurship is observed in the
lawyer or coordinator of a class action lawsuit. Many negative externalities, such as the
health effects of factory pollution, persist because the victims of the effects are numerous,
and the transaction costs of pursuing the enforcement of property rights alone are high.
Coordinating the interests of these parties through an organization that represents their
rights can substantially reduce the costs of bargaining and contracting with the producer of
the externality while promising enough entrepreneurial profit to motivate the coordinator
of the group action. Entrepreneurs may also use technology to reduce transaction costs
(Furubotn and Pejovich, 1972). For example, one of the factors that prevent sufferers of
externalities from gaining retribution from polluters is the inability to prove that pollutants
actually harmed the individuals. Emerging chemical bfingerprintingQtechnologies allow
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researchers to trace the source of various chemicals that end up in certain locations,
providing solid evidence of the source of contamination (Anderson and Leal, 1997).
Entrepreneurs can market or use such technologies to protect potential sufferers or gain
restitution for damages incurred. Hence, we propose:
Definition 3. Institutional entrepreneurship as we use it in this analysis is defined to be: the
process of reducing transactions costs through the development of economic institutions
by profit-motivated economic actors.
The specification of this definition then permits us to propose entrepreneurial action
that follows logically from the existence of the institutional entrepreneurship process.
Accordingly,
Proposition 3A. Externalities present opportunities for entrepreneurial action when
entrepreneurs can reduce transaction costs through the development of economic
institutions.
Proposition 3B. Environmental entrepreneurs reduce environmental degradation and
capture economic value by reducing transaction costs that are associated with
environmentally relevant externalities.
3.5.3. Monopoly power
Models of perfect competition assume that sellers are numerous, such that each seller’s
output decisions have no perceptible influence on the market price (Scherer and Ross,
1990). When this occurs, sellers are price takers, resigned to sell their products at the
competitive market price, and markets have the potential to achieve Pareto efficiency. At
the opposite extreme is the condition of monopoly that is characterized by a single seller.
Monopoly, or more generally monopoly or market power, is considered to be market
failure because it implies that profit maximization on the part of the monopolist will result
in an under-provision and over-charging for goods (Bator, 1958). This outcome is not
Pareto efficient because it results in a loss of consumer surplus that is greater than the
monopolist’s economic profit (producer surplus) (Scherer and Ross, 1990). In other words,
private benefit exceeds social benefit and an opportunity-creating discrepancy exists.
Predictions regarding the effect of monopoly power on environmental degradation are
mixed. On the one hand, firms with monopoly power are argued to be highly inertial
because they are not subject to the pressures of competition. Consequently, they may be
less likely to adopt new technologies and methods of production that would enhance their
efficiency and, presumably, better their use of natural resources. They may also be less
inclined to adopt more environmentally friendly technologies, which is a familiar criticism
of the electrical utility industry for underutilizing wind power. On the other hand, because
monopolists tend to overprice for their products or services, the equilibrium quantity
produced is less than it would otherwise be. In the case of highly polluting industries this
reduction in equilibrium output may serve to reduce the amount of environmental
degradation relative to the equilibrium quantity.
The presence of monopoly power produces opportunities for entrepreneurs because
of the economic value that may be captured from the destruction of the monopoly
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position. Because of the pricing and output policies of firm’s with market power,
customers who are willing to purchase at prices above the costs of production remain
in the market. To capture this potential market, entrepreneurs must break the monopoly
position(s) of the incumbent(s). In the case of statutory monopolies (those resulting
from government restriction of competition), entrepreneurs must overcome the legal
restrictions to entry. In the case of natural monopolies (those resulting from large
economies of scale relative to total demand or anti-competitive behaviors), entrepre-
neurs must either develop efficient small scale production technologies or overcome
other market barriers. We refer to entrepreneurs who break monopoly positions of
existing firms as market appropriating entrepreneurs because they appropriate part of
the market from the incumbent firms.
In some cases, market appropriating entrepreneurship can have negative effects on the
environment. More specifically, in situations in which the monopoly constraint of output is
benefiting the environment, market appropriating entrepreneurship can increase environ-
mental degradation because it increases the quantity of industry output, and therefore the
level of pollution resulting from the industry. On the other hand, in cases where the
monopoly position is preventing the adoption of environmentally superior business
methods, the dissolution of monopoly power can have substantial positive effects on the
environment. For example, the deregulation of the telecommunications industry by the
entrepreneurial efforts of MCI resulted in a more competitive industry in which new
technologies were rapidly developed. Many of these technologies, such as microwave
towers and cell phones, reduced reliance on more resource intensive technologies such as
copper transmission lines.
The electric utility industry provides a similar example in both its history and current
state. Prior to the Public Utility Regulatory Policy Act of 1978, small scale producers of
electricity encountered substantial resistance from monopolistic providers who
controlled the distribution of power. The act required large utilities to purchase power
from small-scale electricity producers and enabled entrepreneurs to develop hydro-
electric and other renewable energy projects. Currently, many argue that the inertial
properties of large organizations in the industry combined with regulatory systems that
set rates based on costs prevents the development and implementation of clean energy
technologies. Environmental entrepreneurs who overcome the market barriers in this
industry may have substantial opportunity to profit from the implementation of
renewable energy and distributed generation technologies while reducing environmental
impacts.
Thus, environmental entrepreneurs who can overcome market power have the
opportunity to profit from the implementation of environmentally superior business
methods. Hence, we propose:
Definition 4. Market appropriating entrepreneurship is defined to be: the process of
breaking monopoly power (or more generally, market power) of incumbent firms by
profit-motivated economic actors.
The specification of this definition then permits us to propose entrepreneurial action
that follows logically from the existence of the market appropriating entrepreneurship
process. Accordingly,
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Proposition 4A. Monopoly power presents opportunities for entrepreneurial action when
entrepreneurs can overcome the market power of incumbent firms.
Proposition 4B. Environmental entrepreneurs reduce environmental degradation and
capture economic value by overcoming the market power of incumbent firms.
3.5.4. Inappropriate government intervention
Government intervention can also be a cause of market failure, have negative impacts
on environmental resources, and be a source of opportunity for environmental
entrepreneurs. Government intervention is considered to be inappropriate when it results
in Pareto inefficiencies in the economic system. The most common environmental
examples are subsidies that support the extraction of natural resources. For example,
timber production has been subsidized through below-cost leases from the U.S.
government and the construction of roads on federal forests (Stroup and Baden, 1973).
Oil extraction is similarly subsidized through tax benefits and regulatory exclusions
(Economist, 2001). Subsidies for the extraction of oil result in substantial negative
environmental impacts including increased climate change and regional air pollution.
Research argues that inappropriate government intervention results from politicians and
regulators pursuing their own political and economic self-interests rather than that of the
public at large, and implementing programs for which they do not bear the direct costs
(Cole, 2000).
Opportunities for entrepreneurship result from the modification of government
subsidies, taxes, and other economic incentives through political strategies. Because
subsidies of one industry support that industry at the expense of others, changes to the
structure of subsidies create economic opportunities. Thus, we refer to entrepreneurs who
motivate changes to subsidies or other government incentive structures in pursuit of their
own self interest as political entrepreneurs. Environmental entrepreneurs can simulta-
neously create economic opportunity and reduce environmental degradation by motivating
the elimination of subsidies or incentives which cause environmental harm. More
specifically, when government subsidies or structures support one industry to the detriment
of environmental resources, entrepreneurial action to eliminate the subsidy can reduce
environmental degradation and create economic opportunities in substitute industries or
technologies. For example, eliminating coal industry subsidies would likely improve the
business prospects for renewable energy ventures.
Similarly, environmental entrepreneurs can employ political strategies to motivate
incentives for more environmentally beneficial industries or technologies. Because of the
substantial external effects that are associated with such activities, entrepreneurs can
encourage government entities to intervene in the interest of society. This typically
requires entrepreneurs not only to justify why changes in subsidization policies are
socially desirable but also to explain how these changes are in the self-interest of
politicians. For example, the use of automobiles creates substantial externalities both in the
effects of emissions on the environment and human health. This has provided
entrepreneurs in industries that support public transportation and its relatively low
emissions – i.e., bus or train manufacturing – with an opportunity to petition government
for subsidization under the motive of improving the environment, increasing jobs
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associated with bus or train manufacturing, and providing necessary and affordable
transportation for the poor. Many governments have then sought to pay for these subsidies
by employing petroleum taxes that are intended to discourage the use of automobiles and
their negative side effects. Accordingly, we propose:
Definition 5. Political entrepreneurship is defined to be: the process of motivating changes
to subsidies, taxes, or other government incentive structures by profit-motivated economic
actors.
The specification of this definition then permits us to propose entrepreneurial action
that follows logically from the existence of the political entrepreneurship process.
Accordingly,
Proposition 5A. Government intervention presents opportunities for entrepreneurial
action when entrepreneurs can motivate changes to subsidies, taxes, and other government
incentive structures.
Proposition 5B. Environmental entrepreneurs reduce environmental degradation and
capture economic value by altering (through political involvement) the structure of
government subsidies, taxes, and other incentives.
3.5.5. Imperfect information
Conditions of imperfect information may also present substantial opportunities for
sustainable entrepreneurship. Models of competitive equilibrium usually assume that
information is perfect (Scherer and Ross, 1990). Perfect information implies that sellers
and buyers have all possible information available (Black, 1997) including that regarding
the nature of present and future markets and productive resources and methods. In reality,
knowledge is never perfect and the imperfection of knowledge creates market failure as it
has been defined in this article.
We divide the nature of imperfect information into two general categories. The first
refers to the knowledge that producers have about supply and demand conditions. The
second refers to the knowledge that customers possess regarding the nature of product or
service attributes. We address the nature of each of these in turn, discussing the manner in
which they can contribute to environmental degradation and present opportunities for
environmental entrepreneurs.
3.5.5.1. Producer-focused informational entrepreneurship. Austrian economists and
others argue that information is not evenly distributed across producers or potential
producers in an economy. More specifically, information regarding the nature of demand
conditions (e.g., customer needs and preferences) or supply possibilities (e.g., product
technologies, process technologies, and sources of inputs) is not available to all entities.
Changes in technology, social tastes, and demographics alter the competitive landscape
continuously bombarding individuals with new information to discover and interpret.
These contextual changes, coupled with disparate interpretations, create market gaps
(Leibenstein, 1968, 1979) or imperfections that remain until they are perceived by alert
entrepreneurs. This information imperfection creates entrepreneurial opportunity because
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the unmet demand conditions or unutilized production possibilities are not immediately
dissipated by entrepreneurial action. We refer to the process of exploiting opportunities
that result from imperfect producer information on demand and supply conditions as
producer-focused informational entrepreneurship. Because this process is most closely
parallel to Austrian conceptions, we also refer to it as Austrian entrepreneurship (Kirzner,
1973, 1979, 1997).
Imperfect information among producers and potential producers can result in
environmental degradation when environmentally superior means of supply are unknown,
or when markets for environmentally superior products are undiscovered (see Sarasvathy
et al. (2003) for a discussion of the role of undiscovered supply and demand as
entrepreneurial opportunity). Opportunities for environmental entrepreneurs exist to
discover and implement new product or process technologies or other means of supply
which are less environmentally damaging. Numerous manufacturers have discovered that
the implementation of clean technologies can result in substantial cost savings and create
advantages over competitors. Dupont, for example, has reduced carbon emissions by over
60% and experienced substantial energy efficiency benefits in the process. Wind power
firms are currently experiencing rapid growth as technology has reduced production costs
and government tax breaks have provided additional incentives. Clipper Wind formed as
an entrepreneurial spin off from Enron Wind (now GE Wind) to capitalize on opportunities
in wind turbine manufacturing and wind project development.
Opportunities for environmental entrepreneurs also exist to discover customers who
prefer environmentally superior products and services — i.e., the environmental market
niche (Reinhardt, 1999). Although the market for products that are differentiated by
their environmental characteristics has been rather small as a percentage of total
demand, the absolute magnitude of such consumers is substantial and subject to change
over time. A number of companies are currently capitalizing on the demand for clean
power from customers who are concerned about the environmental degradation that is
caused by traditional methods of electricity production. A recent start-up, Renewable
Choice Energy, markets wind energy credits to this altruistic market segment without
ever producing a kilowatt of electricity. The 26-year-old founder surmised that he
could combine the door-to-door sales tactics from the bookselling industry to the
marketing of green power. The result is increased revenues flowing to the developers
of wind power and the encouragement of renewable energy projects. We therefore
propose:
Definition 6. Producer-focused informational (or Austrian) entrepreneurship is defined to
be: the process of exploiting opportunities that result from the discovery of knowledge
regarding market supply or demand conditions.
The specification of this definition then permits us to propose entrepreneurial action
that follows logically from the existence of the producer-focused informational
entrepreneurship process. Accordingly,
Proposition 6A. Imperfect information regarding demand and supply conditions presents
opportunities for entrepreneurial action when entrepreneurs can discover the nature of
demand and supply conditions which are unknown to other potential economic actors.
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Proposition 6B. Environmental entrepreneurs reduce environmental degradation and
capture economic value by discovering methods of production which reduce environ-
mental degradation or by marketing environmentally superior products to underserved
environmental market niches.
3.5.5.2. Customer-focused informational entrepreneurship. The other category of
imperfect information refers to the customer’s lack of knowledge regarding the nature
of product or service attributes. Imperfect customer information about product or service
attributes can have substantive impacts on the efficiency of markets. In his seminal
analysis of the market for used cars, Akerlof (1970), for example, demonstrated
theoretically how information asymmetry between buyer and seller can result in the
failure of a market to exist whatsoever. At less extreme levels, imperfect information
regarding product or service attributes can prevent markets from rewarding socially
desirable economic behaviors. For example, the lack of information regarding on-time
arrivals and departures prevented customers from choosing airlines with superior service
records and prevented, to some degree, airlines from focusing on this service attribute as a
source of competitive advantage.
Customer imperfect information can create opportunities for entrepreneurs who
enhance customer information regarding product or service attributes. Akerlof, for
example, proposed that warranties can ameliorate the market failure that is present in the
market for used cars. In addition, challenges facing airlines with superior arrival and
departure records were at least partially resolved by the release of government information
on their performance. We refer to entrepreneurs who enhance customer information in the
pursuit of profit as customer-focused informational entrepreneurs. Customer imperfect
information can contribute to environmental degradation because the lack of customer
information on the environmental impacts of products or associated production processes
prevents them from purchasing products that they might otherwise desire. Customers
concerned about both their own health and broader effects on the environment cannot
express their desires if they do not have adequate information about the environmental
effects of methods of production, product contents, product use, and post-consumer
disposal. The resultant customer uncertainty fails to provide advantage to environmentally
superior producers (or their offerings), and the market system therefore fails to motivate
environmental performance. In short, to the extent that information about the
environmental performance of a company or its products or services is unavailable to a
customer, that customer is unable to express his/her values in buying behavior. The result
is that companies, at the margin, are less inclined to improve their environmental
performance.
Environmental entrepreneurs can capture opportunities by informing customers
regarding the environmental attributes of products and services. Horizon Organic Dairy,
located in Longmont, Colorado, sought to establish a market niche by educating potential
customers about differences between organic and conventional milk. By printing on the
carton that their milk contains no antibodies, hormones, or pesticides, they effectively
informed their customers that conventional milk possesses these attributes while
simultaneously and implicitly conveying that such attributes are undesirable. Perhaps
more important, Horizon also lobbied aggressively to establish and maintain high
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governmental standards to be used in determining what can and cannot be officially
labeled borganic.QThrough such actions Horizon differentiates a commodity through
statutory requirement as well as customer awareness while expanding the acreage under
cultivation without the use of artificial pesticides or fertilizers.
Developments in the green building industry provide another example of how the
enhancement of customer information can reduce information asymmetries between
buyers and sellers, and allow a market to arise. The commercial green building industry is
currently experiencing rapid growth as the result of a self-developed certification system
for green building projects. Established by the U.S. Green Building Council (a group of
industry members), the LEED (Leadership in Energy Efficiency and Design) program
certifies that commercial buildings meet energy efficiency, site impact, and other
environmental criteria. The certification system assures the purchaser of a building that
the commercial building meets its builder’s claims of low environmental impact, cost
efficiency, and indoor air quality. The information provided by the system has created
substantial traction within the market for green buildings. As a result, entrepreneurs, from
green architects to green builders, are benefiting from the growth. Thus, we propose:
Definition 7. Customer-focused informational entrepreneurship is defined to be: the
process of exploiting opportunities by enhancing customer knowledge of product or
service attributes.
The specification of this definition then permits us to propose entrepreneurial action
that follows logically from the existence of the customer-focused informational
entrepreneurship process. Accordingly,
Proposition 7A. Customer imperfect information regarding product or service attributes
presents opportunities for entrepreneurial action if entrepreneurs can inform customers
regarding product or service attributes.
Proposition 7B. Environmental entrepreneurs reduce environmental degradation and
capture economic value by informing customers regarding the environmental attributes of
products or services.
4. Discussion and conclusion
By synthesizing the literature from environmental and welfare economics with that of
entrepreneurship, we have articulated a conception of sustainable entrepreneurship and
outlined how entrepreneurial action can overcome barriers to the efficient functioning of
markets to contribute to the more efficient use of environmental and natural resources and
the development of a more ecologically sustainable economy. Environmental entrepre-
neurs alleviate environmentally relevant market failures through the discovery, evaluation,
and exploitation of opportunities present in market failure.
This conceptualization is based on a number of arguments which may be usefully
summarized as follows: (1) Market failures represent a source of entrepreneurial
opportunities – that is, unmet market demand exists as a result of discrepancies between
private and social costs; (2) Because of the natural characteristics of environmental
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resources they are particularly susceptible to market failure and degradation – as a result,
they represent a substantial source of entrepreneurial opportunity; (3) Because the
exploitation of these opportunities requires the elimination of barriers to the efficient
functioning of markets, entrepreneurial action to exploit market failures serves to move
markets toward states of superior efficiency; (4) The exploitation of environmentally
relevant market failures reduces environmental impacts and moves markets closer to
sustainability; (5) Finally, the categories of market failure discussed in the literature
provide a foundation from which to gain a better understanding of the nature of these
barriers and the manner in which entrepreneurial action may overcome them for economic
gain (See Table 1 for a summary).
Our analysis of the various categories of market failure suggests that the barriers which
must be overcome include the lack of sufficient property rights regimes, the existence of
prohibitive transactions costs, the government support of monopolies or Pareto inefficient
industries, and imperfect information. Environmental entrepreneurs who establish more
effective property rights regimes for environmental resources stand to gain from the
transformation of a public good into a private one or from the elimination of externalities.
Those who reduce transaction costs inherent in existing or potential markets enable the
capturing of gains to trade which exist because of external effects. Others may create
opportunities for themselves by finding ways to eliminate statutory support of competitive
industries or firms. Finally, environmental entrepreneurs may find ways to perfect
information in a manner that provides, creates, or develops markets or allows the
entrepreneur to identify new markets or superior means for serving them. In each of these
cases, in which a barrier to the efficient functioning of a market is creating environmental
degradation, the act of exploitation has the potential to reduce environmental damage and
enhance ecological sustainability.
Our conception of environmental entrepreneurship bears a number of similarities to the
Austrian perspective on entrepreneurship (Shane and Venkataraman, 2000; Kirzner, 1973).
Although subject to interpretation by individual actors, opportunities are assumed to exist
objectively within existing social and economic systems. We also view markets as existing
in perpetual states of disequilibrium with constant alterations from the exogenous shocks
which Eckhardt and Shane (2003) and others discuss. Although exogenous shocks push
markets even further from equilibrium, exploitation of opportunities by entrepreneurs
tends to pull the system towards equilibrium. Finally, because we view entrepreneurship as
a process of exploiting market opportunities, we include both the formation of new
organizations and the actions of existing organizations in our conception.
At the broadest level, however, our investigation suggests that the Austrian perspective
on the domain of the field may be limiting. Our market failure perspective revealed that the
barriers to the efficient functioning of markets go well beyond that of imperfect producer
information regarding the nature of supply and demand. Opportunities inherent in a wide
variety of barriers to the efficient functioning of markets exist and imply a much broader
scope for entrepreneurial action than that of the Austrian perspective. We outline a variety
of categories of entrepreneur including the Coasian, institutional, market appropriating,
political, and informational entrepreneurs. Although we do not argue that we have created
a typology of entrepreneurs, per se, the possibility that the domain of the field may extend
substantially beyond current perspectives is intriguing and demands further investigation.
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Table 1
Market failure, environmental degradation, and opportunities for environmental entrepreneurship
Market failure category Market barrier Implications for environmental
degradation
Opportunity for environmental
entrepreneurship
Category of
entrepreneurship
Public goods Resource non-excludability Tragedy of the Commons
scenario (i.e., depletion of
international fisheries)
Develop property rights regimes
to create excludability (i.e.,
develop right to collect and
market Montana paddlefish
caviar)
Coasian
entrepreneurship
Externalities Prohibitive transactions costs Lack of market exchange for
environmental resources
(i.e., toxic effects of pollutants)
Reduce transaction costs through
the establishment of economic
institutions (i.e., Chicago Climate
Exchange)
Institutional
entrepreneurship
Monopoly power Market power:
A. Statutory
B. Scale related
Mixed effects: Positive–reduced
output in pollution- intensive
industries Negative–Industries
slow to implement beneficial
technologies and products
(i.e., electric utilities)
Break monopoly position of
incumbent firms (i.e., PURPA
legislation which required utilities
to buy power from small-scale
electricity producers and
motivated entrepreneurial
development of renewable energy
resources)
Market appropriating
entrepreneurship
Inappropriate government
intervention
Public policy: subsidies and
other structural incentives
Inappropriate support for
pollution-intensive industries
(i.e., subsidies for oil
extraction/refining)
Alter nature of government
subsidies and other incentives
through the political process
(i.e., petroleum taxes in Europe)
Political
entrepreneurship
Imperfect information Information asymmetry:
A. Across producers regarding
nature of supply and demand
B. Between producers and
consumers regarding product
attributes
A. Environmentally superior
means of supply or environmental
market niches unknown
B. Lack of consumer information
on environmental impacts prevents
them from expressing preferences
A. Discover new environmentally
superior means of supply or
customer segments with
environmental preferences
B. Enhance customer information
regarding environmental attributes
of products of processes
(i.e., LEEDS Green building
certification program)
Informational
entrepreneurship
A. Producer-focused
informational (Austrian)
entrepreneurship
B. Customer-focused
informational
entrepreneurship
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Based on our analysis, such explorations should be founded on the nature of barriers to the
efficient functioning of markets because it is these barriers which allow opportunities to
persist long enough to generate returns. For example, knowing that public goods result
from non-excludability provides greater insight into the types of resources and strategies
that are necessary to equip someone to overcome this obstruction and exploit the
opportunity that it creates. Each type of entrepreneurship may imply substantive
differences in processes, required skills and competencies, risks, and outcomes.
Therefore, our approach differs somewhat from the traditional Austrian approach by
integrating ideas from institutional economics (North and Thomas, 1970) and, of course,
environmental and welfare economics. First, we focus more on the ability of entrepreneurs
to influence the social and economic system and, through that agency, overcome the
barriers which create market failure. In this respect, we see social and economic systems as
subject to modification by various economic agents, including profit-motivated
entrepreneurs. Second, we view economic systems as largely evolutionary in the sense
that the foundational institutions (including property rights) which drive economic
behaviors are subject to change over time. Though not always the case, this evolution
tends to align social goals and private incentives, or stated differently, social and private
costs. Thus, at least partially as the result of entrepreneurial action, economic systems
develop over time to resolve social and environmental ills. This implies an additional
departure from the Austrian view. For the most part, the Austrian view sees disequilibrium
as the result of new or relatively recent exogenous shocks which are not instantly
discovered by alert entrepreneurs. Our more institutional perspective recognizes the
importance of such external changes but also emphasizes the fact that the economic system
is a continually changing set of institutions which, hopfully, evolves to ameliorate both
recent and longstanding market imperfections.
This conception of environmental entrepreneurship and the role of entrepreneurial
action in eliminating environmentally relevant market failures also suggest an alternative
to many scholars’ view that market failure provides a prima facie case for government
regulation. Our position coincides with that of institutional economists who suggest that
market systems and the institutions that define them evolve over time in a manner that can
resolve social ills. Thus, we emphasize the role that entrepreneurs can play in overcoming
the barriers to the efficient functioning of markets and the resolution of environmental
issues. This approach, however, requires intelligent and non-self-serving cooperation on
the part of governmental actors. Rather than suggesting that government has no role to
play in helping to resolve environmental issues, our analysis points to the important role
government plays in establishing appropriate institutions that reward environmentally
sound, entrepreneurial behaviors and that dissuade environmentally degrading ones. Thus,
appropriate public policy is that which establishes property rights regimes and other
economic institutions for environmental and natural resources in a manner that ensures
their proper management for future generations. It also involves eliminating subsidies for
environmentally damaging behaviors and perhaps developing policies that support more
sustainable ones. Accordingly, it seems that the least effective form of government policies
are economically restrictive regulations, especially those which directly prescribe the use
of specific technologies or limit emissions without the right to trade emission credits.
Perhaps most importantly, the proposed conception of environmental entrepreneurship
T.J. Dean, J.S. McMullen / Journal of Business Venturing 22 (2007) 50–7672

recognizes the role of profit-seeking entrepreneurs in motivating the development of
property rights regimes in a manner that can reduce environmental degradation. Finally,
the view that entrepreneurs play a role in motivating changes in public policy, and the
classification of that role as an entrepreneurial act, is somewhat unique, but not
inconsistent with existing conceptions of entrepreneurship. To the extent that exploitation
of opportunity is considered part of the process of entrepreneurship (i.e., Shane and
Venkataraman (2000), who define entrepreneurship as the process of opportunity
discovery, evaluation, and exploitation), motivation of government action may be viewed
as entrepreneurial.
It is not our intention to suggest that all entrepreneurial behavior results in enhanced
environmental welfare. Quite to the contrary, entrepreneurial behavior in a system that
inhibits environmental entrepreneurship as we conceptualize it will naturally tend toward
environmental degradation and natural resource exploitation. Entrepreneurs who
externalize costs because of unprotected public goods or, worse yet, governmentally
created, environmentally degrading discrepancies between private and social costs, will
continue to contribute to the degradation of our environment and ecological sustainability.
Furthermore, proposing that entrepreneurs can help resolve market failures does not imply
that all market failures may be resolved by entrepreneurial action or that all markets can
work to the benefit of society and/or the environment. Instead, we wish to point out the
possibility and manner in which entrepreneurial action is capable of alleviating market
failures and environmental degradation.
Accordingly, we view our conception of sustainable entrepreneurship as a subset of the
general concept of entrepreneurship, and environmental entrepreneurship as a subset of the
broader concept of sustainable entrepreneurship. First, we recognize that many
entrepreneurial actions can actually increase market failure and result in additional
environmental degradation. While these actions may be classified as entrepreneurial, they
do not fall within the domain of sustainable entrepreneurship. Examples of such market-
degrading actions include efforts of entrepreneurs to monopolize industries or externalize
costs by releasing pollution into waterways. Second, because not all market failures are
relevant to environmental resources, a set of opportunities for the elimination of market
failures exists which are classifiable as sustainable entrepreneurship but not environmen-
tally relevant. In short, sustainable entrepreneurship represents a specific class of
entrepreneurship which addresses, among other areas, the capturing of opportunities
present in environmentally relevant market failures wherein the exploitation of the
opportunity alleviates the market failure and reduces environmental degradation. However,
the notion of sustainability also addresses issues such as inequality, poverty, and disease.
Although we chose to demonstrate the efficacy of the framework as it applies to the
reduction of environmentally relevant discrepancies between private and social costs, there
is reason to believe that the proposed theoretical framework could be used to provide
theoretical insight into other issues of sustainability.
In conclusion, we believe that we contribute to the understanding of the role of
entrepreneurs in moving the economy to an environmentally sustainable future. Viewing
economic systems as dynamically adapting to emerging environmental challenges, we see
that entrepreneurs play a role in breaking down barriers to the efficient functioning of
markets and eliminating the market failures which produce environmental degradation and
T.J. Dean, J.S. McMullen / Journal of Business Venturing 22 (2007) 50–76 73

sustainability. Guided by intelligent public policy which enables sustainable entrepre-
neurship, it seems that the innovative power of entrepreneurship could be captured to build
a sustainable world. Given the substantial challenges facing the global environment, we
agree with The Economist’s observation that the environment presents a substantial
opportunity for enterprise and invention, and suggest that it may indeed be time that we
both realize the importance of entrepreneurship to sustainability, and enable entrepreneurs
to achieve its vision.
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