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Muñoz, Lucio, 2020. Sustainability thoughts 109: Linking perfect green market theory to
the circular green economy, In: CEBEM-REDESMA Boletin, Año 14 Nº 7, La Paz, Bolivia.
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Sustainability thoughts 109: Linking perfect green market theory to the circular green
economy
By
Lucio Muñoz*
* Independent qualitative comparative researcher/consultant, Vancouver, BC, Canada. Email: munoz@interchange.ubc.ca
Abstract
Perfect green market theory stipulates that when we correct the traditional market pricing
mechanism of the traditional market to reflect environmental externalities we shift it to a green
market model as we are then closing the environmental sustainability gap, creating in the process
a model with a closed circular green economy. As the traditional market price shifts to the green
market price we shift from a model with broken circular economy under binding environmental
externalities to a model with unbroken circular economy. In other words, the price shift goes one
to one with changes in circular economy structures. Hence, there is a need to understand the link
between the nature of market prices and the nature of related circular economies when
environmental externality accountings becomes binding. For example, what is the nature of the
circular traditional economy under no environmental externality neutrality assumption? What is
nature of the circular green market economy under social externality neutrality assumption?
What is different between those two circular economies in terms of environmental sustainability
gaps? Among the goals of this paper is to give answers to these questions.
Key words
Perfect traditional market, perfect green market, circular traditional economy, circular
green economy, externalities, environmental externality, paradigm shift, market price shift,
environmental margin, traditional market price, green market price, sustainability gap.
Introduction
A) An economy under environmental externality neutrality assumption
In a world with two components, the economy(B) and the environment(C), it can be said
that the economic world with environmental externality assumptions is summarized by the
traditional market(TM) as indicated in Figure 1 below since in this market only economic
goals(B) matter:
Figure 1 above tells us that in the traditional market(TM) traditional production(K) and
traditional consumption(L) take place under the environmental externality neutrality assumption
so no relevant environmental externalities are created during production and consumption
process leading to an unbroken circular traditional market economy between traditional
producers(K) and traditional consumers(L) by assumption. In other words, in the traditional
market model environmental concerns(c) are not important.
i) The model structure
Since the economy(B) is the only relevant component in the traditional market(TM)
depicted in Figure 1 above its model structure can be represented as follows:
1) TM = Bc
Expression 1) above tells us that the environment(c) is a passive or irrelevant component
in this model, and therefore, in this model the environment exists only to support economic
goals.
ii) The price that clears the traditional market
Since only economic goals matter, then only economics costs at a profit matter and need
to be reflected in the traditional pricing mechanism(TMP = P) to clear the market in this
traditional market(TM) depicted in Figure 1 above, which can be stated as follows:
2) TMP = ECM + i = P
Expression 2 above tells us that the traditional market price(TMP = P) is made up by
economic costs plus profits.
iii) The traditional market price-environmental externality inconsistency
A glance at Figure 1 above indicates that in a world where environmental externalities
matter and need to be incorporated in the pricing mechanism of the traditional market, the
traditional market price-environmental externality inconsistency becomes clear; and this
inconsistency results in a broken circular traditional economy under no environmental externality
neutrality assumption, a situation that needs to be corrected by bringing in environmental
responsibility in the traditional market. In 2012 the United Nations Commission on Sustainable
Development Rio + 20(UNCSD 2012a; UNCSD 2012b) moved to address that traditional market
price-environmental externality inconsistency by calling for a move towards a world under green
economies.
B) An economy without environmental externality neutrality assumption
In a world with two components, the economy(B) and the environment(C), it can be said
that the economic world with no environmental externality neutrality assumptions is summarized
by the green market(GM) as shown in Figure 2 below since in this market both economic
goals(B) and environmental goals(C) matter:
Figure 2 above says that in the green market(GM) green production(GK) and green
consumption(GL) take place under no environmental externality neutrality assumption so that all
relevant environmental externalities that are created during production and consumption process
are reflected in the pricing mechanism of the green market(GMP = GP) leading to a unbroken
circular green market economy between green producers(GK) and green consumers(GL) by
assumption correction. In other words, in the green market model environmental concerns(C)
are important.
i) The model structure
Since the economy(B) and the environment(C) are relevant components in the green
market(GM) depicted in Figure 2 above its model structure can be represented as follows:
3) GM = BC
Expression 3) above says that both the economy(B) and the environment(C) are active or
relevant components in this model, and therefore, in this model both the economy(B) and the
environment(C) exist only to support green market goals through win-win coexistence and
choice.
ii) The price that clears the green market
Since here both economic(B) and environmental(C) goals matter, then both economics
costs(ECM) and environmental costs(EM) at a profit matter and need to be reflected in the green
pricing mechanism(GMP = GP) to clear the market in this green market(GM) depicted in Figure
2 above, which can be stated as follows:
4) GMP = ECM + EM + i = GP
Expression 4 above indicates that the green market price(GMP = GP) is made up by the
sum of all costs plus profits.
c) Linking the traditional market price shift with the green market price
If we look at both, the traditional market price and at the green market price we can see
that the traditional market price is a lower market price, which can be indicated as follows:
5) TMP = P = ECM + i < GMP = GP = ECM + EM + i
Notice that to correct that inequality to make it equal we only need to add the
environmental margin(EM) to the traditional market, which leads to the following:
6) TMP = P = ECM + i + EM = GMP = GP = ECM + EM + i
Expression 6) above let us see that when environmental externality accounting becomes
binding the only thing we need to do is to correct the traditional market price(TMP) to account
for the environmental margin(EM); and when we do that the model structure(TM = Bc) and its
traditional price structure(TMP) shifts towards the model structure of green markets(GM = BC)
and its green price structure(GMP). The shift from traditional market pricing to green market
pricing means that the nature of the circular economies they drive also shift or change. In other
words, the price shift goes one to one with changes in circular economy structures. Perfect green
market theory stipulates that when we correct the traditional market pricing mechanism of the
traditional market to reflect environmental externalities we shift it to a green market model as we
are then closing the environmental sustainability gap, creating in the process a model with an
unbroken circular green economy. How a perfect green market would look like(Muñoz 2016)
and how it should be expected to behave under perfect green market competition(Muñoz 2019)
as well as what the nature of perfect green market illusion is(Muñoz 2020) have been pointed out
very recently.
Hence, there is a need to understand the link between the nature of market prices and the
nature of related circular economies when environmental externality accountings becomes
binding. For example, what is the nature of the circular traditional economy under no
environmental externality neutrality assumption? What is nature of the circular green market
economy under social externality neutrality assumption? What is different between those two
circular economies in terms of environmental sustainability gaps? Among the goals of this paper
is to give answers to these questions.
Goals of this paper
i) To point out the structure of the circular traditional economy when under no
environmental externality neutrality assumption; ii) To highlight the structure of circular green
market economy when under social externality neutrality assumption; and iii) To stress
difference between those two circular economies in terms of environmental sustainability gaps.
Methodology
i) the terminology and operation concepts used in this paper are introduced; ii) the
structure of the traditional market under no environmental externality assumptions is shared; iii)
the structure of the circular traditional market economy under no environmental externality
neutrality assumption is shown; iv) the structure of the circular green market economy under
social externality neutrality assumption is highlighted; v) the structure of these two circular
economies are compared to highlight that one has no environmental sustainability gap; and vi)
some food for thoughts and conclusions are provided.
Terminology
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A = active social system a = passive social system
B = active economic system b = passive economic system
C = active environmental system c = passive environmental system
TM = traditional market GM = green market
K = traditional producers/supply L = traditional consumers/demand
GK = green producers/supply GL = green consumers/demand
E(T) = externalization of T I(t) = internalization of t
E(AC) = externalization of A and C I(ac) = internalization of a and c
TMP = traditional market price GMP = green market price
ESG = environmental sustainability gap EEG = environmental externality gap
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Operational concepts and externalization and internalization rules
i) Operational concepts
1) Traditional market, the economy only market
2) Green market, the environmentally friendly market
3)Traditional market price, the general market economic only price or the price that covers the
cost of production at profit(TMP = ECM + i = P) or zero profit(TMP = ECM = P).
4) Green market price, the price that reflects both the economic and the environmental cost of
production or the price that covers the cost of environmentally friendly production.
5) Cost externalization, the leaving out of the pricing mechanism of the market relevant costs
associated with production.
6) Social cost externalization, the leaving out of the pricing mechanism of the market the social
costs associated with production.
7) Environmental cost externalization, the leaving out of the pricing mechanism of the market
the environmental costs associated with production.
8) Economic cost externalization, the leaving out of the pricing mechanism of the market the
economic costs associated with production.
9) Cost externalization assumption neutrality, the assumption that production has minimal or
no cost impact on external factors to a market model.
10) Full costing, the reflecting in the pricing mechanism of the market all cost associated with
production; there are no market distortions.
11) Partial costing, not reflecting in the pricing mechanism of the market all cost associated
with production; there are partial market distortions.
12) No costing, not reflecting in the pricing mechanism of the market any costs associated with
production; there is full market distortion.
13) Full inclusion, all factors are endogenous to the model, there are no exclusions.
14) Partial inclusion, some factors are exogenous to the model, there are some exclusions.
15) Fully independent development choices, when we have individual development choices
unrelated to each other or pure choices such as society only(A), economy only(B), and
environment only(C). In this world only fully independent development choices exist so the set =
{A, B, C}. This is the world of the Arrow Impossibility theory and theorem.
16) Partially codependent development choices, when we have mixed/paired development
choices such as socio-economy(AB), socio-environment(AC), and eco-economy(BC). In this
universe only codependent development choices exist so the set = {AB, AC, BC}. This is outside
the normal world of the Arrow Impossibility theory and theorem.
17) Fully codependent development choices, when all development choices are mixed together
such as the socio-economy-environment(ABC) model. In this paradigm only fully codependent
development choices exist so the set = {ABC}. This is outside the world of the Arrow
Impossibility theory and theorem.
18) Full cost externalization, all costs associated with production are not reflected in the
pricing mechanism of the market.
19) Partial cost externalization, some costs associated with production are not reflected in the
pricing mechanism of the market.
20) No cost externalization, all costs associated with production are reflected in the pricing
mechanism of the market.
21) Full cost internalization, all costs associated with production are reflected in the pricing
mechanism of the market.
22) Partial cost internalization, some costs associated with production are reflected in the
pricing mechanism of the market.
23) No cost internalization, all costs associated with production are not reflected in the pricing
mechanism of the market.
24) Externalities, factors assumed exogenous to a model
25) Full externality assumption, only one component is the endogenous factor in the model; the
others are exogenous factors.
26) Partial externality assumption, not all factors are endogenous factors at the same time in
the model.
27) No externality assumption, all factors are endogenous factors at the same time in the
model.
28) Economic externality, the economic costs associated with production not reflected in the
pricing mechanism of the market.
29) Social externality, the social cost associated with production not reflected in the pricing
mechanism of the market.
30) Environmental externality, the environmental cost associated with production not reflected
in the pricing mechanism of the market.
31) Green or environmental margin, to cover the extra cost of making the business
environmentally friendly.
32) Social margin, to cover the extra cost of making the business socially friendly.
33) Economic margin, to cover only the economic cost of production
34) Profit, the incentive to encourage economic activity
35) Full cost price, a price that reflects all costs associated with production.
36) Some cost price, a price that reflects only some costs associated with production.
37) No cost price, a price that does not reflect any cost associated with production.
38) Circular market illusion, the idea that production activity can take place without producing
relevant externalities.
39) Circular traditional economy illusion, the idea that production activity can take place
without producing relevant social and/or environmental externalities.
40) Circular dwarf green economy, the idea that market prices can be manipulated externally
to generate revenue to cover the cost of dealing with the environmental externality they create to
close the non-free market cycle dwarf green production-dwarf green consumption-environmental
externality.
41) Circular green economy, the idea that market prices reflect the cost of making business
environmentally friendly in order to cover the cost of dealing with the environmental
externalities they create to close the free market cycle green production-green consumption-
environmental externality.
42) Circular environmental externality management based market illusion, the idea that you
can solve an environmental externality problem by dealing with the consequences of that
problem, not the cause.
43) Circular green economy illusion, the idea that green production and green consumption
can take place without having social impacts(E(A) = 0).
ii) Externalization rules
Let’s assume we have a market with two relevant components, society(A) and
environment(C), where A = active component, a = passive component, C = active component,
and c = passive component, then the externalization rules(E) work as follows:
1) E(A) = a --- relevant social costs(A) are assumed irrelevant
2) E(C) = c --- relevant environmental costs(C) are assumed irrelevant
3) E(AC) = ac --- relevant social costs and environmental costs(AC) are assumed irrelevant
iii) Internalization rules
Let’s assume we have a market with two relevant components, society(A) and
environment(C), where A = active component, a = passive component, C = active component,
and c = passive component, then the internalization rules(I) work as follows:
4) I(a) = A ---- irrelevant social costs(a) are now relevant
5) I(c) = C ---- irrelevant environmental costs(c) are now relevant
6) I(ac) = AC ---- irrelevant social costs and environmental costs(ac) are now relevant
iv) Model structure and externalization rules
Let’s assume we have the following three market structures M1 = ac, M2 = Ac and M3 =
AC, then the following holds true:
7) M1 = ac = E(AC) = a fully irresponsible market as all costs are externalized
8) M2 = Ac = [I(a)][E(C)] = a partially responsible market as social cost is internalized
9) M3 = AC = [I(a)][I(c)] = a fully responsible market as all costs are internalized.
v) Reversing externalization rules
Let’s assume we have a market with two relevant components, society(A) and
environment(C), where A = active component, a = passive component, C = active component,
and c = passive component, then the process of reversing externalization-internalization rules
works as follows:
The case of internalizing the externality: if E(AC) = ac, the following holds true:
10) I[E(AC)] = I(ac) = AC, internalization-externalization forces cancel each other out
The case of externalizing the internality: if I(ac) = AC, the following holds true:
11) E[I(ac)] = E(AC) = ac, externalization-internalization forces cancel each other out
The traditional market under no environmental externality neutrality assumptions
When accounting for environmental externalities becomes binding then the circular
traditional economy(TM) depicted in Figure 1 in the introduction above breaks as in reality
relevant environmental externalities[E(C)] are being produced and externalized, as indicated in
Figure 3 below:
Figure 3 above tells as that there are relevant traditional production(K) and traditional
consumption(L) environmental externalities being produce as economic activity takes place as
indicated by the continuous black arrows from K and L to E(C), but they are being externalized
as indicated by the continuous brown arrow from TM to E(C) because they were assumed to be
irrelevant in the traditional market model(TM).
The circular traditional market economy under no environmental externality neutrality
assumption
The externalization of relevant environmental externalities[E(C)] means that there is a
disconnect between the pricing mechanism of the traditional market(TM) and the relevant
externalities[E(C)] when environmental externality accounting matters, which leads to a broken
circular traditional economy, a situation that can be represented as in Figure 4 below:
Figure 4 above points out that the disconnect between the traditional market pricing and
externalities indicated by the broken blue arrow creates an environmental sustainability
gap(ESG) breaking the production-consumption-environmental externality cycle as indicated by
the broken green arrow, which affects the sustainability of the traditional market. In other words,
externalizing relevant environmental externalities[(E(C)] leads to an environmental sustainability
gap(ESG) that breaks the circular structure of the traditional market(TM).
The circular green market economy structure under social externality neutrality
assumption
When the environment(C) matter; and therefore, we internalized the cost of the relevant
environmental externalities[I(c)] in the pricing mechanism of the traditional market(TM) we shift
to the world of green markets(GM), a world that can be expressed as in Figure 5 below:
Figure 5 above says that the internalization of the environmental externality[I(c)] closes
the environmental sustainability gap(ESG ) that existed in the circular traditional economy
leading to an unbroken or continuous circular green economy. In other words, the internalization
of relevant environmental externalities[I(c)] leads to the closing of the production-consumption-
environmental externality cycle.
Comparing the circular traditional economy with the circular green economy
Therefore, in the circular green market(GM) there is no environmental sustainability
gap(ESG ) as there is no disconnect between the green market price and the relevant
environmental externality while the opposite is true in the circular traditional economy when
relevant environmental externalities must be accounted for, a situation that can be easily
appreciated in Figure 6 below:
Comparing the two circular economies in Figure 6 above it is clear that only in the
traditional market(TM), figure to the left, there is a disconnect between pricing and relevant
externalities as relevant externalities are being externalized as indicated by the broken blue arrow
from TM to E(C); and therefore, only in the traditional markets there is an environmental
sustainability gap(ESG ) as indicated by the broken green arrow from E(C) to K.
Food for thoughts
a) Do the full correction of distorted market pricing mechanisms leads to paradigm
shifts? I think yes, what do you think? and b) Are externality management markets consistent
with free market thinking? I think no, what do you think?
Conclusions
It was highlighted that when environmental externalities need to be accounted for the
traditional market illusion of environmental externality neutrality breaks. It was stressed that the
disconnection traditional market price-environmental externality creates an environmental
sustainability gap breaking the circular traditional economy cycle. It was indicated that when
internalizing the environmental externality the traditional market price shifts to the green market
price closing the environmental sustainability gap that was present in the circular traditional
economy. It was shown that when comparing the structure of the circular traditional economy
and of the green economy only the traditional economy has a price-environmental externality
disconnection; and therefore, only the circular traditional economy has an environmental
sustainability gap when environmental externality accounting is binding.
References
Muñoz, Lucio, 2016. Beyond Traditional Market Thinking: What is the Structure of the
Perfect Green market?, In: International Journal of Science Social Studies Humanities and
Management (IJSSSHM), Vol. 2, No. 5., May, Ed. Dr. Maya Pant, India.
Muñoz, Lucio, 2019. From Traditional Markets to Green Markets: A Look at Markets
Under Perfect Green Market Competition, Weber Economics & Finance (ISSN:2449-
1662), Vol. 7 (1) 2019, Article ID wef_253, 1147-1156.
Muñoz, Lucio, 2020. Sustainability thoughts 103: How the shift from traditional markets to
green markets would have looked like had the 1987 Brundtland Commission recommended
then an environmental sustainability fix?, Boletin CEBEM-REDESMA, Año 14, No.3,
March, La Paz, Bolivia.
United Nations Conference on Sustainable Development(UNCSD), 2012a. Rio+20 Concludes
with Big Package of Commitments for Action and Agreement by World Leaders on Path for a
Sustainable Future, Press Release, June 20-22, New York, NY, USA.
United Nations Conference on Sustainable Development(UNCSD), 2012b. The Future We
Want, June 20-22, New York, NY, USA.
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Citation:
Muñoz, Lucio, 2020. Sustainability thoughts 109: Linking perfect green market theory to
the circular green economy, In: CEBEM-REDESMA Boletin, Año 14 Nº 7, La Paz, Bolivia.
