Environmental Economics

Environmental economics may sound like an oxymoron to those who believe that saving the environment must be based on a moral, rather than financial, imperative. This chapter argues otherwise. Here, Fullerton suggests that by identifying the market failures responsible for the production of pollution, and by helping to design policy proposals that maximize cost-effectiveness, economics can be a powerful tool for environmental protection. Before the first Earth Day in 1970, ‘environmental economics’ did not yet exist, per se, although individual economists had certainly considered pollution issues. Fullerton explores the ideas and legacies of the early pioneers (Pigou, Coase, Hardin, Dales, Baumol, Oates, Weitzman), and discusses the relationship between these ideas and environmental policies enacted (such as the 1990 US Clean Air Act Amendments, that initiated sulfur dioxide permit trading and thus largely eliminated the problem of acid rain). In this chapter, Fullerton not only explores the history of environmental economics, but discusses which policies (e.g. taxation and permitting) are more suited for different kinds and degrees of pollution. The discipline of environmental economics – which, in recent years, has incorporated new theoretical ideas, and has become more empirically driven by advances in ‘big data’ – has a role to play in tackling many of the environmental issues we face today, from contaminated water, to endangered species.