Editing Environmental economics (section)

== Solutions ==
Solutions advocated to correct such externalities include:

* ''[[United States Environmental Protection Agency#Related legislation|Environmental regulations]]''. Under this plan, the economic impact has to be estimated by the regulator. Usually, this is done using [[cost–benefit analysis]]. There is a growing realization that regulations (also known as "command and control" instruments) are not so distinct from economic instruments as is commonly asserted by proponents of environmental economics. E.g.1 regulations are enforced by fines, which operate as a form of tax if pollution rises above the threshold prescribed. E.g.2 pollution must be monitored and laws enforced, whether under a pollution tax regime or a regulatory regime. The main difference an environmental economist would argue exists between the two methods, however, is the total cost of the regulation. "Command and control" regulation often applies uniform emissions limits on polluters, even though each firm has different costs for emissions reductions, i.e., some firms, in this system, can abate pollution inexpensively, while others can only abate it at high cost. Because of this, the total abatement in the system comprises some expensive and some inexpensive efforts. Consequently, modern "Command and control" regulations are oftentimes designed in a way that addresses these issues by incorporating utility parameters. For instance, CO<sub>2</sub> emission standards for specific manufacturers in the automotive industry are either linked to the average vehicle footprint (US system) or average vehicle weight (EU system) of their entire vehicle fleet. Environmental economic regulations find the cheapest emission abatement efforts first, and then move on to the more expensive methods. E.g. as said earlier, trading, in the quota system, means a firm only abates pollution if doing so would cost less than paying someone else to make the same reduction. This leads to a lower cost for the total abatement effort as a whole.{{citation needed|date=May 2012}}
* ''[[quota on pollution|Quotas on pollution]]''. Often it is advocated that pollution reductions should be achieved by way of [[tradeable emissions permits]], which if freely traded may ensure that reductions in pollution are achieved at least cost. In theory, if such tradeable quotas are allowed, then a firm would reduce its own pollution load only if doing so would cost less than paying someone else to make the same reduction, i.e., only if buying tradeable permits from another firm(s) is costlier. These tradeable permit approaches can also, in theory, improve economic efficiency and cost-effectiveness while increasing government revenue through the use of permit auctions instead of grandfathering practices.<ref>{{Cite journal |last=Álvarez |first=Francisco |last2=André |first2=Francisco J. |date=2015-12-01 |title=Auctioning Versus Grandfathering in Cap-and-Trade Systems with Market Power and Incomplete Information |url=https://link.springer.com/article/10.1007/s10640-014-9839-z |journal=Environmental and Resource Economics |language=en |volume=62 |issue=4 |pages=873–906 |doi=10.1007/s10640-014-9839-z |issn=1573-1502}}</ref> This entails the government selling off a certain number of these tradeable permits, allowing the government to capture the value of emissions and use it to reduce marginal tax rates.<ref>{{Cite journal |last=Keohane |first=Nathaniel O. |date=2009-01-01 |title=Cap and Trade, Rehabilitated: Using Tradable Permits to Control U.S. Greenhouse Gases |url=https://doi.org/10.1093/reep/ren021 |journal=Review of Environmental Economics and Policy |volume=3 |issue=1 |pages=42–62 |doi=10.1093/reep/ren021 |issn=1750-6816}}</ref> In practice, tradeable permits approaches have had some success, such as the U.S.'s sulphur dioxide trading program or the EU Emissions Trading Scheme, and interest in its application is spreading to other environmental problems.
* ''[[Tax, tariff and trade|Taxes and tariffs on pollution]]''. Increasing the costs of polluting will discourage polluting, and will provide a "dynamic incentive", that is, the disincentive continues to operate even as pollution levels fall. A pollution tax that reduces pollution to the socially "optimal" level would be set at such a level that pollution occurs only if the benefits to society (for example, in form of greater production) exceeds the costs. This concept was introduced by [[Arthur Cecil Pigou|Arthur Pigou]], a British economist active in the late nineteenth through the mid-twentieth century. He showed that these externalities occur when markets fail, meaning they do not naturally produce the socially optimal amount of a good or service. He argued that “a tax on the production of paint would encourage the [polluting] factory to reduce production to the amount best for society as a whole.”<ref>{{Cite book|title=A little history of economics|last=Kishtainy, Niall|isbn=978-0-300-23452-7|oclc=1039849897|date=2018-02-27|publisher=Yale University Press }}</ref> These taxes are known amongst economists as [[Pigouvian tax|Pigouvian Taxes]], and they regularly implemented where negative externalities are present. Some advocate a major shift from taxation from income and sales taxes to tax on pollution – the so-called "[[green tax shift]]".
* ''Better defined [[property rights]]''. The [[Coase Theorem]] states that assigning property rights will lead to an optimal solution, regardless of who receives them, if [[transaction cost]]s are trivial and the number of parties negotiating is limited. For example, if people living near a factory had a right to clean air and water, or the factory had the right to pollute, then either the factory could pay those affected by the pollution or the people could pay the factory not to pollute. Or, citizens could take action themselves as they would if other property rights were violated. The US River Keepers Law of the 1880s was an early example, giving citizens downstream the right to end pollution upstream themselves if the government itself did not act (an early example of [[bioregional democracy]]). Many markets for "pollution rights" have been created in the late twentieth century—see [[emissions trading]]. Supply-side environmental policy implements efficiency by letting countries that are affected by climate change "[https://www.journals.uchicago.edu/doi/abs/10.1086/665405 buy coal]" or other fossil fuel reserves abroad with the intention of conserving them: Harstad (2012). According to the Coase Theorem, the involved parties will bargain with each other, which results in an efficient solution. However, modern economic theory has shown that the presence of asymmetric information may lead to inefficient bargaining outcomes.<ref>{{Cite journal|last1=Myerson|first1=Roger B|last2=Satterthwaite|first2=Mark A|date=1983|title=Efficient mechanisms for bilateral trading|journal=Journal of Economic Theory|volume=29|issue=2|pages=265–281|doi=10.1016/0022-0531(83)90048-0|issn=0022-0531|url=http://www.kellogg.northwestern.edu/research/math/papers/469.pdf |archive-url=https://web.archive.org/web/20060901154809/http://www.kellogg.northwestern.edu/research/math/papers/469.pdf |archive-date=2006-09-01 |url-status=live|hdl=10419/220829|hdl-access=free}}</ref> Specifically, Rob (1989) has shown that pollution claim settlements will not lead to the socially optimal outcome when the individuals that will be affected by pollution have learned private information about their disutility already before the negotiations take place.<ref>{{Cite journal|last=Rob|first=Rafael|date=1989|title=Pollution claim settlements under private information|journal=Journal of Economic Theory|volume=47|issue=2|pages=307–333|doi=10.1016/0022-0531(89)90022-7|issn=0022-0531}}</ref> Goldlücke and Schmitz (2018) have shown that inefficiencies may also result if the parties learn their private information only after the negotiations, provided that the feasible transfer payments are bounded.<ref>{{Cite journal|last1=Goldlücke|first1=Susanne|last2=Schmitz|first2=Patrick W.|date=2018|title=Pollution claim settlements reconsidered: Hidden information and bounded payments|journal=European Economic Review|volume=110|pages=211–222|doi=10.1016/j.euroecorev.2018.08.005|issn=0014-2921|doi-access=free}}</ref> Using cooperative game theory, Gonzalez, Marciano and Solal (2019) have shown that in social cost problems involving more than three agents, the Coase theorem suffers from many counterexamples and that only two types of property rights lead to an optimal solution.<ref>{{Cite journal|last1=Gonzalez|first1=Stéphane|last2=Marciano|first2=Alain|last3=Solal|first3=Philippe|date=2019|title=The social cost problem, rights, and the (non)empty core|journal=Journal of Public Economic Theory|volume=21|issue=2 |pages=347–365|doi=10.1111/jpet.12334|s2cid=158059174 }}</ref>
* ''Accounting for environmental externalities in the final price''. In fact, the world's largest industries burn about $7.3 trillion of free natural capital per year.<ref>{{Cite web |last=Roberts |first=David |date=2013-04-17 |title=None of the world's top industries would be profitable if they paid for the natural capital they use |url=https://grist.org/business-technology/none-of-the-worlds-top-industries-would-be-profitable-if-they-paid-for-the-natural-capital-they-use/ |access-date=2022-12-14 |website=Grist |language=en-us}}</ref> Thus, the world's largest industries would hardly be profitable if they had to pay for this destruction of natural capital. Trucost has assessed over 100 direct environmental impacts and condensed them into 6 key environmental performance indicators (EKPIs).<ref name=":0">{{Cite web |last=Joseph |date=2013-04-01 |title=Natural Capital at Risk: The Top 100 Externalities of Business |url=https://capitalscoalition.org/natural-capital-at-risk-the-top-100-externalities-of-business/ |access-date=2022-12-14 |website=Capitals Coalition |language=en-GB}}</ref> The assessment of environmental impacts is derived from different sources (academic journals, governments, studies, etc.) due to the lack of market prices. The table below gives an overview of the 5 regional sectors per EKPI with the highest impact on the overall EKPI:
{| class="wikitable"
|+Ranking of the 5 region-sectors by EKPI with the greatest impact across all EKPIs when measured in monetary terms<ref name=":0" />
!Rank
!IMPACT
!SECTOR
!REGION
!NATURAL CAPITAL COST, $BN
!REVENU, $BN
!IMPACT RATIO
|-
|1
|GHG
|Coal Power Generation
|Eastern Asia
|361.0
|443.1
|0.8
|-
|2
|Land Use
|Cattle Ranching and Farming
|South America
|312.1
|16.6
|18.7
|-
|3
|GHG
|Iron and Steel Mills
|Eastern Asia
|216.1
|604.7
|0.4
|-
|4
|Water
|Wheat Farming
|Southern Asia
|214.4
|31.8
|6.7
|-
|5
|GHG
|Coal Power Generation
|Northern America
|201.0
|246.7
|0.8
|}
If companies are allowed to include some of these externalities in their final prices, this could undermine the [[Jevons paradox]] and provide enough revenue to help companies innovate.