ABSTRACT
This chapter has three sections. The first section presents the standard economic theory of externalities, demonstrating the need for a tax (in the case of a negative externality) or a subsidy (in the case of a positive externality) to correct a market failure. The second section discusses economists’ methods to monetarily value environmental services and natural capital, including revealed and stated preference methods, as well as cost-benefit analysis and discounting. The third section describes different environmental policy options, such as pollution taxes and tradable pollution permits. The chapter concludes with a summary of environmental policies in the real world.
