ABSTRACT
In theory, the market is miraculous. Individual consumers and firms, all acting in their own self-interest in the market, can bring about an efficient allocation of goods and services with only worthwhile levels of stress on the environment and natural resources. The logic behind market efficiency follows from the underpinnings of supply and demand, as explained in detail in Chapter 2. The supply curve reflects the marginal cost of production and the demand curve reflects the marginal benefit of consumption. When the market price and quantity are determined by the intersection of supply and demand, the efficiency criterion that marginal cost equals marginal benefit is achieved. This is the result Adam Smith reveled about in his discussion of the “unseen hand” that seems to guide the economy to efficiency. Unfortunately, as is the topic of this chapter, the invisible hand can be misguided by unseen environmental costs and benefits, unfettered market power, unrealized information, and unwillingness to pay for goods whose benefits cannot be withheld.
