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Chapter Review Chapter 18: Environmental Economics

  1. Government may have a role in the economy when markets fail to produce an efficient outcome. When positive or negative externalities exist, markets will not provide an efficient outcome.
  2. One way to deal with externalities is to assign clear-cut property rights.
  3. Governments may deal with environmental externalities by imposing regulatory measures (the command and control approach), levying taxes and granting subsidies, or issuing marketable permits.
  4. In a perfect market, natural resources are used up at an efficient rate. However, privately owned resources may be sold too soon, for two reasons. First, owners may fear that if they do not sell the resources soon, new government rules may prevent them from selling at all or, in any case, may lower the return from selling in the future. Second, interest rates facing owners may be high, so they may value future income less than society does in general. High interest rates lead to a faster exploitation of natural resources.
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