Pollution is one example of a Tragedy of the Commons.* Everyone loses if we all pollute, but no one person or factory individually wins if they stop. Is there a way to get a large group of people to all act at once?—-

Let’s say I create a futures contract. This is a contract is a bet on how much pollution there will be, total, next year. I sell many contracts for 50 bucks. At the end of the year, I buy back the contract. The less pollution there was that year, the more I pay.

• Who will buy the contracts? People who think pollution is going to go down.
• Who will (short) sell the contracts? People who think pollution is going to go up.

These contracts reflect the price of pollution. For example, if people think there will be a lot of pollution, the contracts won’t be worth much, because people won’t expect me to pay much.

Someone who can reduce pollution can buy a lot of these contracts cheaply, find a way to cut a lot of pollution, and make a lot of money.

Rather than fill in the blanks, I’ll add a few more:

• What negatives might this cause, particularly with heavy polluters?
• This system does not require a government authority (to levy fees or enforce permits). In what situations might this be useful/necessary?
• How (if it is possible), could this be used to affect the level of pollution?

* 2 characteristics of this sort of problem: 1) it involves collective action and 2) is an economic externality.