Institutional economics and the environment

[From text] What is Institutional Economics? Before delving into the concept of institutional economics, it will be useful to explain what is meant by institutions because institutions in economics have a particular meaning. The most commonly agreed upon definition for institutions is a set of formal and informal rules of conduct that facilitate coordination or govern relationships between individuals or groups. The formal rules include laws, contracts, political systems, organisations, and markets, while the informal rules of conduct consist of norms, traditions, customs, value systems, religions and sociological trends. Institutions provide for more certainty in human interaction (North, 1990) and have an influence on outcomes such as economic performance, efficiency, economic growth and development. They can either benefit or hinder these economic measures. Williamson (2000) noted that new institutional economics operates at both the macro and micro levels. The macro level deals with the institutional environment, or the rules of the game, which affect the behaviour and performance of economic actors and in which organisational forms and transactions are embedded. Williamson (1993) described it as the set of fundamental political, social and legal ground rules that establish the basis for production, exchange and distribution. The micro level analysis known as the institutional arrangement, on the other hand, deals with the institutions of governance. These refer to the modes of managing transaction costs and include issues of social capital, property rights and collective action. Here the focus is on the individual transaction and the questions regarding organisational forms (private property versus common pool resources) are analysed. An institutional arrangement is an arrangement between economic units that govern the ways in which its members can co-operate or compete