ABSTRACT

Natural resources, such as forests and commercially exploitable fisheries, and environmental attributes, such as air quality, are valuable assets in that they yield flows of services to people. Public policies and the actions of individuals and firms can lead to changes in the flows of these services, thereby creating benefits and costs. Because of externalities and the common-property and public-good characteristics of at least some of these services, market forces can be relied on neither to guide them to their most highly valued uses nor to reveal prices that reflect their true social values. Externalities arise when a real variable (not a price) chosen by one economic agent enters the utility or production function of other economic agents and there is no requirement to or incentive for the first agent to take the effect on others into account when making choices.