Environmental Economics — Definition

Definition

Environmental economics examines how economic decisions affect environmental resources and how institutions can account for those effects. An externality arises when a decision imposes a cost or benefit on others outside the relevant transaction.

Private incentives may then differ from social consequences. Taxes, permits, rules and negotiated arrangements can address parts of the problem, but each needs suitable information and enforcement. Analysis should also distinguish efficiency from distribution: a low-cost method of reducing harm does not by itself determine how its burdens and benefits should be shared.