Introduction

This book is a primer on the economics of the environment and natural resources. The title, Markets and the Environment, suggests one of our central themes. An understanding of markets — why they work, when they fail, and what lessons they offer for the design of environmental policies and the management of natural resources — is central to an understanding of environmental issues. But even before we start thinking about how markets work, it is useful to begin with a more basic question: What is environmental economics?

Economics and the Environment

"Environmental economics" may seem like a contradiction in terms. Some people think that economics is just about money, that it is preoccupied with profits and economic growth and has nothing to do with the effects of human activity on the planet. Others view environmentalists as being naive about economic realities or "more concerned about animals than jobs."

Of course neither stereotype is true. Indeed, not only is "the environment" not separate from "the economy," but environmental problems cannot be fully understood without understanding basic economic concepts. Economics helps explain why firms and individuals make the decisions they do — why coal (despite generating significant local air pollution and carbon dioxide emissions) still generates almost 40 percent of electricity in the United States, or why some people drive large sport utility vehicles instead of Priuses. Economics also helps predict how those same firms and individuals will respond to a new set of incentives — for example, what investments electric utilities will make in a carbon-constrained world and how high gas prices would have to rise before people stopped buying enormous cars.

At its core, economics is the study of the allocation of scarce resources. This central focus, as much as anything else, makes it eminently suited to analyzing environmental problems. Let's take a concrete example. The Columbia and the Snake Rivers drain much of the U.S. Pacific Northwest, providing water for drinking, irrigation, transportation, and electricity generation and supporting endangered salmon populations. All these activities — including salmon preservation — provide economic benefits to the extent that people value them.

If there is not enough water to meet all those needs, then we must trade off one good thing for another (less irrigation for more fish habitat, for example). How should we as a society balance these competing claims against each other? To what lengths should we go to protect the salmon? What other valu