[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Chapter 18
ENVIRONMENTAL
ECONOMICS
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Among the most contentious issues today is the impact of the economy on the
environment. Usually, the discussion portrays economic activity and environmental
concerns as diametrically opposed. Producing more goods and services
generates more pollution, uses up more and more land, and contributes to global
warming. It may seem that the fundamental perspective of economics—that of
scarcity—hardly applies to things like pollution. After all, most people think we have
too much pollution, not a scarcity of it. Yet the tools of economics can provide critical
insights into the causes of environmental pollution, and these insights help shape the
ways that government has tried to design policies to protect the environment.
The basic competitive model yielded the conclusion that markets would produce
efficient outcomes. But we have seen, in Chapter 11 and again in Chapter 17, that in some
situations, markets fail to produce efficient outcomes. In those circumstances, government
may have an economic role to play. This justification for government involvement
in the market is known as the market failure approach to the role of government.
Many environmental problems are the result of a market failure that arises
because of the presence of externalities—costs and benefits of a transaction
that are not fully reflected in the market price. In this chapter, we focus on negative
externalities and the issues of environmental protection.
Negative Externalities and
Oversupply
The basic competitive model assumes that the costs of producing a good and the
benefits of selling it all accrue to the seller, and that the benefits of receiving the
good and the costs of buying it all accrue to the buyer. This is often not the case. As
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