Environmentalists are well intentioned. In protecting the environment, environmentalists pursue interventions aimed at altering behaviour and market outcomes. To their delight, economists neatly rationalise these efforts through the concept of ‘negative externalities’, the case where two parties to a transaction externalise part of the cost onto a third party—e.g. pollution. This market failure justifies an intervention (e.g. Pigouvian taxes) to internalise the social cost and in turn reduce the market quantity.
Unfortunately, when misguided, interventions tend to fall victim to the phenomenon known as the ‘the law of unintended consequences’ or ‘the cobra effect’, a term popularised by German economist Horst Siebert.