Economics of the Environment Summary

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Benefits of environmental protection and optimum amounts of pollution are difficult to measure. Economists are divided over the economic merit of pollution abatement, although they generally agree that some degree of environmental protection will benefit overall human wellbeing.

Because the environment is a public good, it is subject to the same open access problem as other goods. Individuals have less inclination to engage or invest in long-lived environmental protection measures than if they had ownership of the good. Poor countries are also banking on receiving the benefits of environmental protection actions taken by more developed countries and, in that sense, on getting a free ride. Greenhouse gases, ozone, and acid rain are public goods because measures taken to reduce them by one country benefit all the others. Within a country or municipality, the government can overcome the free riding problem by imposing taxes and fines. At the international level, imposition of environmental laws requires international cooperation, ratification of treaties, and the financial commitment of rich and industrial nations. Since the United Nations does not have the power or authority to force any member states to comply with the laws, the terms for enforcing the laws must be clearly spelled out in the treaty itself.

There is no clear strategy to ensure public health while at the same time maintaining optimal efficiency. When a command-and-control system is used, firms are required to install cleanup equipment. However, the government must ensure that the cost of abatement is not prohibitive and the economic welfare of the firm is also considered. Two incentive-based approaches were discussed. Permits can be issued by the government, auctioned off, or traded between firms to achieve an efficient level of pollution. Alternatively, fines and taxes can be imposed to reach the same results. Unfortunately, both approaches also provide incentives for polluters to lie. In a tax system, firms are encouraged to underestimate pollution as taxes will be imposed per unit volume or weight of emission. With permits, firms have an incentive to overestimate emission, because they can get more permits. Process-based regulations are effective in assessing the total amount of waste in a given process, differentiating among various manufacturing technologies and helping firms in their initial planning stages of development. What is clear is that neither safety nor efficiency alone can be used to set standards, and some risk/benefit analysis is needed to decide on the most effective approach.


(1) Toossi Reza, "Energy and the Environment:Sources, technologies, and impacts", Verve Publishers, 2005

Further Reading

Chapman, D., Environmental Economics: Theory, Application, and Policy,” Addison-Wiley, 2000.

Goodstein, E. S., Economics and the Environment, 4th Ed., John Wiley & Sons, 2002.

Siebert, H., Economics of the Environment: Theory and Policy, Springer Verlog, 2004.

Dauvergne, P., Handbook of Global Environmental Politics, Edward Elgar Publishing, 2005.

Journal of Environmental Economics and Management (JEEM), the journal of Association of Environmental and Resource Economics.

Ecological Economics – Direct Science Elsevier Publishing Company, the journal of the International Society for Ecological Economics (ISEE).

Environmental Economics and Policy Studies – Published by Springer-Verlog, New York is the official journal of the Society for Environmental Economics and Policy Studies.

External Links

US Agency for International Development (

National Center for Environmental Economics (

United Nations Development Program (

United Nations Environment Programme (

Intergovernmental Panel on Climate Change (

World Resource Institute (

Union of Concerned Scientists (