|Part of a series about|
Environmental economics is a sub-field of economics concerned with environmental issues.  It has become a widely studied subject due to growing environmental concerns in the twenty-first century. Environmental economics "undertakes theoretical or empirical studies of the economic effects of national or local environmental policies around the world. ... Particular issues include the costs and benefits of alternative environmental policies to deal with air pollution, water quality, toxic substances, solid waste, and global warming." 
Environmental economics is distinguished from ecological economics in that ecological economics emphasizes the economy as a subsystem of the ecosystem with its focus upon preserving natural capital.  One survey of German economists found that ecological and environmental economics are different schools of economic thought, with ecological economists emphasizing "strong" sustainability and rejecting the proposition that human-made ("physical") capital can substitute for natural capital. 
The modern field of environmental economics has been traced to the 1960s  with significant contribution from Post-Keynesian economist Paul Davidson, who had just completed a management position with the Continental Oil Company. 
|Part of a series on|
Central to environmental economics is the concept of market failure. Market failure means that markets fail to allocate resources efficiently. As stated by Hanley, Shogren, and White (2007):  "A market failure occurs when the market does not allocate scarce resources to generate the greatest social welfare. A wedge exists between what a private person does given market prices and what society might want him or her to do to protect the environment. Such a wedge implies wastefulness or economic inefficiency; resources can be reallocated to make at least one person better off without making anyone else worse off." This results in a inefficient market that needs to be corrected through avenues such as government intervention. Common forms of market failure include externalities, non-excludability and non-rivalry. 
An externality exists when a person makes a choice that affects other people in a way that is not accounted for in the market price. An externality can be positive or negative but is usually associated with negative externalities in environmental economics. For instance, water seepage in residential buildings occurring in upper floors affect the lower floors.  Another example concerns how the sale of Amazon timber disregards the amount of carbon dioxide released in the cutting.  [ better source needed ] Or a firm emitting pollution will typically not take into account the costs that its pollution imposes on others. As a result, pollution may occur in excess of the 'socially efficient' level, which is the level that would exist if the market was required to account for the pollution. A classic definition influenced by Kenneth Arrow and James Meade is provided by Heller and Starrett (1976), who define an externality as "a situation in which the private economy lacks sufficient incentives to create a potential market in some good and the nonexistence of this market results in losses of Pareto efficiency".  In economic terminology, externalities are examples of market failures, in which the unfettered market does not lead to an efficient outcome.
When it is too costly to exclude some people from access to an environmental resource, the resource is either called a common property resource (when there is rivalry for the resource, such that one person's use of the resource reduces others' opportunity to use the resource) or a public good (when use of the resource is non-rivalrous). In either case of non-exclusion, market allocation is likely to be inefficient.
These challenges have long been recognized. Hardin's (1968) concept of the tragedy of the commons popularized the challenges involved in non-exclusion and common property. "Commons" refers to the environmental asset itself, "common property resource" or "common pool resource" refers to a property right regime that allows for some collective body to devise schemes to exclude others, thereby allowing the capture of future benefit streams; and "open-access" implies no ownership in the sense that property everyone owns nobody owns. 
The basic problem is that if people ignore the scarcity value of the commons, they can end up expending too much effort, over harvesting a resource (e.g., a fishery). Hardin theorizes that in the absence of restrictions, users of an open-access resource will use it more than if they had to pay for it and had exclusive rights, leading to environmental degradation. See, however, Ostrom's (1990) work on how people using real common property resources have worked to establish self-governing rules to reduce the risk of the tragedy of the commons. 
The mitigation of climate change effects is an example of a public good, where the social benefits are not reflected completely in the market price. Because the personal marginal benefits are less than the social benefits the market under-provides climate change mitigation. This is a public good since the risks of climate change are both non-rival and non-excludable. Such efforts are non-rival since climate mitigation provided to one does not reduce the level of mitigation that anyone else enjoys. They are non-excludable actions as they will have global consequences from which no one can be excluded. A country's incentive to invest in carbon abatement is reduced because it can "free ride" off the efforts of other countries. Over a century ago, Swedish economist Knut Wicksell (1896) first discussed how public goods can be under-provided by the market because people might conceal their preferences for the good, but still enjoy the benefits without paying for them.
Assessing the economic value of the environment is a major topic within the field. The values of natural resources often are not reflected in prices that markets set and, in fact, many of them are available at no monetary charge. This mismatch frequently causes distortions in pricing of natural assets: both overuse of them and underinvestment in them.  Economic value or tangible benefits of ecosystem services and, more generally, of natural resources, include both use and indirect (see the nature section of ecological economics). Non-use values include existence, option, and bequest values. For example, some people may value the existence of a diverse set of species, regardless of the effect of the loss of a species on ecosystem services. The existence of these species may have an option value, as there may be the possibility of using it for some human purpose. For example, certain plants may be researched for drugs. Individuals may value the ability to leave a pristine environment for their children.
Use and indirect use values can often be inferred from revealed behavior, such as the cost of taking recreational trips or using hedonic methods in which values are estimated based on observed prices. Non-use values are usually estimated using stated preference methods such as contingent valuation or choice modelling. Contingent valuation typically takes the form of surveys in which people are asked how much they would pay to observe and recreate in the environment (willingness to pay) or their willingness to accept (WTA) compensation for the destruction of the environmental good. Hedonic pricing examines the effect the environment has on economic decisions through housing prices, traveling expenses, and payments to visit parks. 
Almost all governments and states magnify environmental harm by providing various types of subsidies that have the effect of paying companies and other economic actors more to exploit natural resources than to protect them. The damage to nature of such public subsidies has been conservatively estimated at $4-$6 trillion U.S. dollars per year. 
Solutions advocated to correct such externalities include:
|Rank||IMPACT||SECTOR||REGION||NATURAL CAPITAL COST, $BN||REVENU, $BN||IMPACT RATIO|
|1||GHG||Coal Power Generation||Eastern Asia||361.0||443.1||0.8|
|2||Land Use||Cattle Ranching and Farming||South America||312.1||16.6||18.7|
|3||GHG||Iron and Steel Mills||Eastern Asia||216.1||604.7||0.4|
|4||Water||Wheat Farming||Southern Asia||214.4||31.8||6.7|
|5||GHG||Coal Power Generation||Northern America||201.0||246.7||0.8|
If companies are allowed to include some of these externalities in their final prices, this could undermine the Jevons paradox and provide enough revenue to help companies innovate.
Environmental economics is related to ecological economics but there are differences. Most environmental economists have been trained as economists. They apply the tools of economics to address environmental problems, many of which are related to so-called market failures—circumstances wherein the "invisible hand" of economics is unreliable. Most ecological economists have been trained as ecologists, but have expanded the scope of their work to consider the impacts of humans and their economic activity on ecological systems and services, and vice versa. This field takes as its premise that economics is a strict subfield of ecology. Ecological economics is sometimes described as taking a more pluralistic approach to environmental problems and focuses more explicitly on long-term environmental sustainability and issues of scale.
Environmental economics is viewed as more idealistic in a price system; ecological economics as more realistic in its attempts to integrate elements outside of the price system as primary arbiters of decisions. These two groups of specialists sometimes have conflicting views which may be traced to the different philosophical underpinnings.
Another context in which externalities apply is when globalization permits one player in a market who is unconcerned with biodiversity to undercut prices of another who is - creating a race to the bottom in regulations and conservation. This, in turn, may cause loss of natural capital with consequent erosion, water purity problems, diseases, desertification, and other outcomes that are not efficient in an economic sense. This concern is related to the subfield of sustainable development and its political relation, the anti-globalization movement.
Environmental economics was once distinct from resource economics. Natural resource economics as a subfield began when the main concern of researchers was the optimal commercial exploitation of natural resource stocks. But resource managers and policy-makers eventually began to pay attention to the broader importance of natural resources (e.g. values of fish and trees beyond just their commercial exploitation). It is now difficult to distinguish "environmental" and "natural resource" economics as separate fields as the two became associated with sustainability. Many of the more radical green economists split off to work on an alternate political economy.
Environmental economics was a major influence on the theories of natural capitalism and environmental finance, which could be said to be two sub-branches of environmental economics concerned with resource conservation in production, and the value of biodiversity to humans, respectively. The theory of natural capitalism (Hawken, Lovins, Lovins) goes further than traditional environmental economics by envisioning a world where natural services are considered on par with physical capital.
The more radical green economists reject neoclassical economics in favour of a new political economy beyond capitalism or communism that gives a greater emphasis to the interaction of the human economy and the natural environment, acknowledging that "economy is three-fifths of ecology" - Mike Nickerson. This political group is a proponent of a transition to renewable energy.
These more radical approaches would imply changes to money supply and likely also a bioregional democracy so that political, economic, and ecological "environmental limits" were all aligned, and not subject to the arbitrage normally possible under capitalism.
An emerging sub-field of environmental economics studies its intersection with development economics. Dubbed "envirodevonomics" by Michael Greenstone and B. Kelsey Jack in their paper "Envirodevonomics: A Research Agenda for a Young Field", the sub-field is primarily interested in studying "why environmental quality [is] so poor in developing countries."  A strategy for better understanding this correlation between a country's GDP and its environmental quality involves analyzing how many of the central concepts of environmental economics, including market failures, externalities, and willingness to pay, may be complicated by the particular problems facing developing countries, such as political issues, lack of infrastructure, or inadequate financing tools, among many others. 
In the field of law and economics, environmental law is studied from an economic perspective. The economic analysis of environmental law studies instruments such as zoning, expropriation, licensing, third party liability, safety regulation, mandatory insurance, and criminal sanctions. A book by Michael Faure (2003) surveys this literature. 
The main academic and professional organizations for the discipline of Environmental Economics are the Association of Environmental and Resource Economists (AERE) and the European Association for Environmental and Resource Economics (EAERE). The main academic and professional organization for the discipline of Ecological Economics is the International Society for Ecological Economics (ISEE). The main organization for Green Economics is the Green Economics Institute.
Emissions trading is a market-based approach to controlling pollution by providing economic incentives for reducing the emissions of pollutants. The concept is also known as cap and trade (CAT) or emissions trading scheme (ETS). Carbon emission trading for CO2 and other greenhouse gases has been introduced in China, the European Union and other countries as a key tool for climate change mitigation. Other schemes include sulfur dioxide and other pollutants.
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's activity. Externalities can be considered as unpriced goods involved in either consumer or producer market transactions. Air pollution from motor vehicles is one example. The cost of air pollution to society is not paid by either the producers or users of motorized transport to the rest of society. Water pollution from mills and factories is another example. All consumers are made worse off by pollution but are not compensated by the market for this damage. A positive externality is when an individual's consumption in a market increases the well-being of others, but the individual does not charge the third party for the benefit. The third party is essentially getting a free product. An example of this might be the apartment above a bakery receiving the benefit of enjoyment from smelling fresh pastries every morning. The people who live in the apartment do not compensate the bakery for this benefit.
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point of view. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick. Market failures are often associated with public goods, time-inconsistent preferences, information asymmetries, non-competitive markets, principal–agent problems, or externalities.
This aims to be a complete article list of economics topics:
An environmental tax, ecotax, or green tax is a tax levied on activities which are considered to be harmful to the environment and is intended to promote environmentally friendly activities via economic incentives. A notable example is carbon tax. Such a policy can complement or avert the need for regulatory approaches. Often, an ecotax policy proposal may attempt to maintain overall tax revenue by proportionately reducing other taxes ; such proposals are known as a green tax shift towards ecological taxation. Ecotaxes address the failure of free markets to consider environmental impacts.
A Pigouvian tax is a tax on any market activity that generates negative externalities. The tax is normally set by the government to correct an undesirable or inefficient market outcome and does so by being set equal to the external marginal cost of the negative externalities. In the presence of negative externalities, social cost includes private cost and external cost caused by negative externalities. This means the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. Often-cited examples of negative externalities are environmental pollution and increased public healthcare costs associated with tobacco and sugary drink consumption.
Free-market environmentalism argues that the free market, property rights, and tort law provide the best means of preserving the environment, internalizing pollution costs, and conserving resources.
Eco-capitalism, also known as environmental capitalism or (sometimes) green capitalism, is the view that capital exists in nature as "natural capital" on which all wealth depends. Therefore, governments should use market-based policy-instruments to resolve environmental problems.
Contingent valuation is a survey-based economic technique for the valuation of non-market resources, such as environmental preservation or the impact of externalities like pollution. While these resources do give people utility, certain aspects of them do not have a market price as they are not directly sold – for example, people receive benefit from a beautiful view of a mountain, but it would be tough to value using price-based models. Contingent valuation surveys are one technique which is used to measure these aspects. Contingent valuation is often referred to as a stated preference model, in contrast to a price-based revealed preference model. Both models are utility-based. Typically the survey asks how much money people would be willing to pay to maintain the existence of an environmental feature, such as biodiversity.
In environmental law, the polluter pays principle is enacted to make the party responsible for producing pollution responsible for paying for the damage done to the natural environment. This principle has also been used to put the costs of pollution prevention on the polluter. It is regarded as a regional custom because of the strong support it has received in most Organisation for Economic Co-operation and Development (OECD) and European Union countries. It is a fundamental principle in US environmental law.
Environmental goods are typically non-market goods, including clean air, clean water, landscape, green transport infrastructure, public parks, urban parks, rivers, mountains, forests, and beaches. Environmental goods are a sub-category of public goods. Concerns with environmental goods focus on the effects that the exploitation of ecological systems have on the economy, the well-being of humans and other species, and on the environment. Users not having to pay an upfront cost and external factors like pollution that can damage environmental goods indefinitely are some of the challenges in protecting environmental goods.
Carbon pricing is a method for nations to address climate change. The cost is applied to greenhouse gas emissions in order to encourage polluters to reduce the combustion of coal, oil and gas – the main driver of climate change. The method is widely agreed and considered to be efficient. Carbon pricing seeks to address the economic problem that emissions of CO2 and other greenhouse gases (GHG) are a negative externality – a detrimental product that is not charged for by any market.
An environmental enterprise is an environmentally friendly/compatible business. Specifically, an environmental enterprise is a business that produces value in the same manner which an ecosystem does, neither producing waste nor consuming unsustainable resources. In addition, an environmental enterprise rather finds alternative ways to produce one's products instead of taking advantage of animals for the sake of human profits. To be closer to the goal of being an environmentally friendly company, some environmental enterprises invest their money to develop or improve their technologies which are also environmentally friendly. In addition, environmental enterprises usually try to reduce global warming, so some companies use materials that are environmentally friendly to build their stores. They also set in place regulations that are environmentally friendly. All these efforts of the environmental enterprises can bring positive effects both for nature and people. The concept is rooted in the well-enumerated theories of natural capital, the eco-economy and cradle to cradle design. Examples of environmental enterprise would be Seventh Generation, Inc., and Whole Foods.
In environmental law and policy, market-based instruments (MBIs) are policy instruments that use markets, price, and other economic variables to provide incentives for polluters to reduce or eliminate negative environmental externalities. MBIs seek to address the market failure of externalities by incorporating the external cost of production or consumption activities through taxes or charges on processes or products, or by creating property rights and facilitating the establishment of a proxy market for the use of environmental services. Market-based instruments are also referred to as economic instruments, price-based instruments, new environmental policy instruments (NEPIs) or new instruments of environmental policy.
Payments for ecosystem services (PES), also known as payments for environmental services, are incentives offered to farmers or landowners in exchange for managing their land to provide some sort of ecological service. They have been defined as "a transparent system for the additional provision of environmental services through conditional payments to voluntary providers". These programmes promote the conservation of natural resources in the marketplace.
Green accounting is a type of accounting that attempts to factor environmental costs into the financial results of operations. It has been argued that gross domestic product ignores the environment and therefore policymakers need a revised model that incorporates green accounting. The major purpose of green accounting is to help businesses understand and manage the potential quid pro quo between traditional economics goals and environmental goals. It also increases the important information available for analyzing policy issues, especially when those vital pieces of information are often overlooked. Green accounting is said to only ensure weak sustainability, which should be considered as a step toward ultimately a strong sustainability.
The economics of climate change mitigation is the part of the economics of climate change related to climate change mitigation, that is actions that are designed to limit the amount of long-term climate change. Mitigation may be achieved through the reduction of greenhouse gas (GHG) emissions and the enhancement of sinks that absorb GHGs, for example forests.
In economics, an environmentally honest market system refers to a market which reflects ecological and environmental health costs such as resource depletion and pollution.
The commodification of nature is an area of research within critical environmental studies that is concerned with the ways in which natural entities and processes are made exchangeable through the market, and the implications thereof.
The pollution haven hypothesis posits that, when large industrialized nations seek to set up factories or offices abroad, they will often look for the cheapest option in terms of resources and labor that offers the land and material access they require. However, this often comes at the cost of environmentally unsound practices. Developing nations with cheap resources and labor tend to have less stringent environmental regulations, and conversely, nations with stricter environmental regulations become more expensive for companies as a result of the costs associated with meeting these standards. Thus, companies that choose to physically invest in foreign countries tend to (re)locate to the countries with the lowest environmental standards or weakest enforcement.