Mainstream liberal economic theory:

Mainstream liberal economic theory, which posits that the “invisible hand of the market” will necessarily guarantee the rational and equitable allocation of resources within society, has been called into question in recent decades by proponents of ecological economics. Undermining the very premises upon which the classical theory rests, those who have challenged it point to endemic market failures rooted in externalities, the costs or benefits of economic transactions that are not reflected in the price mechanism. The existence of unaccounted-for externalities, these critics say, prevents markets from realizing their functions optimally. In effect, many of the adverse outcomes of economic activity can be attributed to such hidden costs.

One pioneer of environmental economics is Professor Herman Daly, whose writings expose the fallacy underlying a market system that ignores the impact of externalities on the environment. Economic systems, he claims, are embedded in the natural ecosystem, which sustains them. However, most of the services provided by nature are priced by economists as zero and received by producers for free. For example, if farmers had to pay for the services of the bees that pollinated their crops, the prices of fruit on the market would be much higher. Likewise, if a livestock farmer dumps contaminants into a river, but does not pay for the costs of removing them, the price of meat will not reflect the cost of this activity. Ultimately, unless the principle of “the polluter pays” is insisted upon, society will pay for these externalities, in the dearth of fresh water, or in health hazards.

If markets are to correct these failures, the externalized costs unaccounted for by current pricing mechanisms must be internalized, and the use of natural resources should be taxed for public revenue. This would be an ameliorative step that might restrain some of the trends which are depleting natural capital at the expense of future generations. Nonetheless, a radically new paradigm, which set limits to economic activity, and recognizes that natural resources must not only be paid for, but also conserved, would be required to support a truly sustainable economy.

The primary purpose of the passage is to...

A. Describe the flaws of a conceptual model and propose remedies for its application
B. Caution against the misuse of a widely-held theory
C. Contrast the results of divergent applications of a model
D. Advocate for broader acceptance of a useful hypothesis and describe the consequences of such acceptance
E. Undermine the justifications for a revision of a prevalent theory