Environmental Problems: A Market Failure

This chapter presents an economic perspective on environmental problems. Pollution, climate change, and all other environmental problems are considered by economists as negative externalities and market failures. To solve environmental problems, economic activity, which is intrinsically linked with nature and natural resources, needs to be controlled in such a way to achieve a social optimum where social welfare is maximized. A Pigouvian tax that puts prices on negative externalities in the form of environmental taxation is examined in this chapter as an example of environmental policy instruments designed to achieve a social optimum.