Environmental Law, Economics Of

From the perspective of economics, the fundamental role of environmental law is to internalize externalities. Environmental problems are a case of market failure caused by negative externalities. A negative externality is a consequence of an economic activity of one agent decreasing the welfare of another agent if the market mechanism does not mediate this connection between the two individuals. The emissions of airborne pollutants generated by a production process and reducing the air quality in the neighborhood of the plant are among the many environmental examples.

Externalities destroy the ability of markets to provide for optimal allocation of scarce resources. The reason is that environmental resources are used free of charge by the generator of the externality. Thereby, rational agents do not appropriately consider resource scarcity ...