Environmental Economics — Economic Framework

Economic Framework

A negative externality creates a gap between private and social costs. The simple corrective-tax benchmark concerns marginal external damage at the relevant outcome. Pigou's 1920 analysis provides a historical anchor; Coase's 1960 work examines the conditions under which bargaining can address such problems. Clear rights do not eliminate transaction costs or enforcement difficulties.

Cost-effective control need not mean equal reductions by each source. If A's first two tonnes cost ₹100 and ₹150 to abate while B's first costs ₹300, A can meet a two-tonne target for ₹250 instead of the ₹400 cost of one tonne each. The example assumes equal environmental effects across locations and no hotspots.

A tax directly sets a unit price, with the resulting emissions responding to behaviour. A cap-and-trade system directly sets the covered aggregate quantity, while permit prices respond. Tradable permits received free can still have an opportunity cost because using them may forgo sale value.

Shared access does not imply non-rivalry. Fish stocks and aquifers can be common-pool resources because extraction reduces availability to others while exclusion is difficult. Finally, efficiency and fairness need separate attention. Revenue use, access to alternatives and adjustment support can influence who bears a policy's costs, while measurement and institutions determine whether its environmental objective is achieved.