The essence of effective entrepreneurship is finding a better way.

When faced with a problem, many people immediately think of a regulatory or governmental approach rather than an economic approach. But I believe that the entrepreneurial, economic approach is often better for a variety of reasons.

Take pollution that is emitted from industrial plants for example. The regulatory approach is to establish an agency to set and enforce standards limiting pollution. This leads to endless hearings, arguments, political pressure to grandfather critical plants that may be shut down if the standards are enforced, and much time and expense in bureaucracies, litigation and enforcement.

On the other hand, the entrepreneurial approach is to create a market. Grant businesses rights to emit a number of units of pollution. They cannot grow and emit more pollution unless they purchase the rights to additional pollution. Since the number of rights is limited, the company wanting to buy additional rights must be willing to pay someone else to reduce emissions by buying their rights.

The advantages to this approach are multiple. First, it allows people to do direct cost/benefit analysis. If the rights to pollute are selling for $5 million and it only costs me $4 million to put in pollution control equipment, I can sell the rights and use the proceeds to buy the pollution control equipment. The buyer of the rights might be a business hiring thousands of workers, but has a cost of $1 billion to eliminate the same amount of pollution. A regulatory approach might insist that all businesses reduce pollution by the same amount and force the buyer out of business since it may not have the economic resources to spend $1 billion.

Second, a market provides an economic incentive to reduce pollution by letting entrepreneurs know how much the potential payoff might be to finding a better way to reduce it.

Third, it allows environmentalists to "put their money where their mouth is" and actually purchase the rights and then not use them to reduce the total amount of pollution.

Fourth, the regulatory and enforcement costs are a small fraction of simply imposing a hard rule. In fact, the participants might effectively enforce the rules for you since they don't want a competitor to cheat and have a cost advantage.

Another example would be freeway congestion. Rather than simply regulating fast lane use only to carpools, an experiment in Southern California puts a price on using the fast lane. By installing a toll tag on the dashboard that can be read by electronic monitors, a mother can make a trade-off between paying a $6 fee to use the fast lane or being late to pick up a child at day care and pay a $20 late fee. The price can vary depending on congestion. As a result, the most congested areas generate the most money, which is then used to build more roads to eliminate the congestion where it is most valuable to do so. It also provides to the car with occupants who aren't in a hurry sufficient economic incentive to reduce congestion by getting out of the fast lane for the mother for whom time is really valuable.

Simply imposing a regulation that everyone must meet regardless of pain or cost does not provide the flexibility of putting a price on a valuable commodity like clean air or commute time and allowing people to make clear trade-offs. The entrepreneurial, economic solution often is more effective, efficient and easier.