An Economic Perspective on Environmental and Resource Management

By Wallace E. Oates
Washington, DC (January 1, 2006)- Economics has three basic and important messages for environmental protection: an unfettered market system will generate excessive pollution, we can quantify how clean should the environment be, and policy can be structured to realize efficient and cost-effective environmental goals.

The central concern of economics is the allocation of scarce resources. The basic problem is one of using limited means to provide an array of goods and services that satisfies peoples’ preferences in an efficient and equitable manner. It doesn’t require much reflection to realize that environmental resources are scarce. Clean air and water, the diversity of species, and perhaps even a stable global climate are clearly not available in unlimited supply, irrespective of human activities.
First, economic analysis makes a compelling case for the proposition that an unfettered market system will generate excessive pollution. A market system, in a sense, “overuses” many of the services provided by the environment, resulting in excessive environmental degradation. Thus, economics makes a basic and persuasive case for the need for public intervention in the form of environmental regulation.
Second, economics provides some guidance for the setting of standards for environmental quality. It provides one approach to answering the question: How clean should the environment be? In fact, this approach is simply a straightforward application of the general economic principle that any activity should be extended to the point where the marginal benefits equal the marginal costs.
And third, the standards or targets have been determined for environmental quality economics has some important things to say about the design of the policy instruments to achieve these standards. In particular, economic analysis suggests how to structure policy measures so as to realize environmental goals in the most effective and least-cost ways.
Related Resources:
An Economic Perspective on Environmental and Resource Management