ABSTRACT
At a fundamental level economics deals with tradeoffs. This chapter explores the tradeoff between economic activities (i.e., the extraction, production and consumption of goods and services) and environmental quality (i.e., degradation). Beginning with a simple analytical model, the chapter shows in a systematic manner the ecological and technological determinants of the tradeoff between economic activity and environmental quality. Key ideas examined are the waste assimilative capacity of the environment, the nature and quality of the waste generated from the economic system, and how technology can be used to mitigate environmental damages or deteriorations. The chapter also offers a systematic analysis of the causes and consequences of market failure. One key result is how an ‘optimal’ trade-off between economic activity and environmental quality can be realized in the presence of externality (the cause for market failure). However, the chapter notes how difficult the choice among alternative institutional arrangements to correct market failure is due to the ubiquitous nature of transaction costs. The chapter concludes that recognition of market failure is an important first step, its remedy requires careful attention to both the nature of the environmental damage(s) and the choice of the regulatory regime(s).
