ABSTRACT
In this chapter we explain how the individual behavior of firms and households results, in a world lacking institutions to enforce efficient environmental policies, in nonoptimal consumption and production of ordinary goods. The nonoptimal production and consumption of ordinary goods in turn results in nonoptimally high levels of residuals and hence nonoptimally low levels of environmental quality. Specifically, we will see that too many polluting goods are produced and consumed relative to other goods in the uncontrolled case, with the result that too little environmental quality exists.
