Discovery Guides Areas


Environmental Economics: Basic Concepts and Debates
(Released April 2007)

  by Ethan Goffman  


Key Citations




Cap and Trade: A flexible environmental regulation mechanism that sets an overall limit on the emission of a certain pollutant, but allows companies that can easily reduce emissions to sell credits to other companies for which such reduction would be difficult. The cap ensures that emissions will not exceed a desired amount.

Discounting: "The process of placing progressively lower numerical values on future benefits and costs the further into the future they occur. The practice of discounting arises because individuals attach less weight to a benefit or cost in the future than they do to a benefit or cost now." (

Ecosystem services: The multifold ways the natural environment contributes to the human economy. These include air and water purification, agricultural pollination, nutrient cycling, soil enrichment, climate stabilization, medicinal products and drought mitigation; collectively, their global value has been estimated at some $33 trillion a year. See for more information.

Emissions Charges: "A fixed tax rate per unit of emissions" ( An emissions charge is the simplest regulation mechanism that allows polluters some flexibility.

Environmental Kuznets Curve (EKC): The theory that as countries develop they generate large amounts of pollution, but this shrinks as they approach economic maturity. Two major factors thought to cause this shrinkage are increased levels of citizen concern and technological improvements. The EKC is derived from the Kuznets curve, which theorizes a similar tendency regarding economic inequality.

Equimarginal Principle: The point at which consumption or production minimizes spending per unit consumed or produced. In environmental economics, the point at which desired emissions reductions for different firms are achieved at the minimum possible cost.

Externalities: According to one source, "a technological externality is the indirect effect of a consumption activity or a production activity on the consumption or production possibilities available to some other consumer or producer" (
. For environmental purposes, an externality is a cost inflicted on the environment-and indirectly on those who use or depend on the environment-not borne by those who inflict the cost.

First Law of Thermodynamics: The principle that "neither matter nor energy can be either created or destroyed" (Daly & Farley, glossary); "an expression of the universal law of conservation of energy [that] identifies heat transfer as a form of energy transfer" ( To ecological economists this means that the economy must eventually reach a steady state, rather than continuing to grow indefinitely.

Gross National Product (GNP): "An estimate of the total money value of all the final goods and services produced in a given one-year period by the factors of production owned by a particular country's residents" ( Many ecological economists believe that GNP is a simplistic measure that fails to account for environmental goods and services.

Kyoto Treaty: An agreement among the industrialized nations of the world to reduce emissions of six greenhouse gases through 2012. More than 170 nations initially signed the treaty, including the U.S., the European Union, Canada, and Japan. Although the U.S. Congress refused to ratify the Kyoto Treaty, it came into effect when Russia approved it in 2005.

Marginal Abatement Cost (MAC): "The marginal cost of reducing pollution. Firms have different abatement costs, depending on the product they produce and technologies used. The MAC is assumed to increase as pollution decreases, because increasingly sophisticated and expensive technologies have to be used." (

Steady State Economy: A theoretical state in which the human economy has ceased to grow, but remains at a healthy, sustainable level. In a steady state economy "quantitative growth is replaced by qualitative development or improvement as the basic goal" (Daly & Farley, glossary).

Sustainability: A concept defined by the seminal Brundtland Declaration of 1987: "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs." Implicit here is the idea that the natural environment faces stress and overexploitation and will not be able to indefinitely meet escalating human demands.

Sustainable Growth: The notion that the human economy can continue to grow while keeping environmental damage to a level at which the environment can regenerate itself and sustain future human development.

Throughput: "The flow of raw materials and energy from the global ecosystem's sources of low entropy (mines, wells, fisheries, croplands), through the economy, and back to the global ecosystem's sinks for high entropy wastes (atmosphere, oceans, dumps)" (Daly & Farley, glossary).

Tragedy of the Commons (or Problem of the Commons): A concept derived from "the case of a communal pasture area where all individuals are free to graze their livestock. The `tragedy' arises because these `commons' were typically heavily over grazed." ( The principle is easily extended to common environmental resources, such as air or water, which, absent regulation, individuals and businesses have little incentive not to pollute.


Daly, H. & Farley, J. 2004. Ecological Economics: Principles and Applications. Washington, DC: Island Press.