H ow are environmental threats related to economic development and growth?1 At one extreme, some researchers claim that growth has already exceeded the sustainable level of activity on Earth (Meadows et al. 1972). At the other extreme, some researchers believe that technical progress will make it possible to meet the demand that will result from increased population and per capita income (Kahn et al. 1976). In some overly simplified analyses, growth is the main culprit, whereas in others, it is the principal panacea for environmental issues. Neither of these simple positions is tenable: the truth is that we need growth not least for poverty alleviation but must avoid the kind of growth that leads to ecological damage that in turn will threaten welfare. We need to focus not on the simple yes or no to growth but on the sectoral and technical characteristics that will give us sustainable growth. In this chapter we focus on the links between economic growth and the environment and the circumstances when the market mechanism is inefficient at allocating environmental resources.