Economic Theory and Environmental Degradation: A Survey of Some Problems

Abstract

Both market and policy failures can lead to environmental degradation. Considerable progress has been made in the area of project evaluation and the valuation of environmental effects. On the other hand the analytical tools to study the effects of policy failures —the impact of taxes, prices, exchange rate and incentives— are more limited. The correct handling of uncertainty also remains a major issue. The analysis of international environmental problems, such as acid rain or CO2 buildup, may benefit from the application of game theory approaches and the use of revelation mechanisms designed for public goods.