Environmental economics is a area of economics that studies the use of natural resources and the effects of human activities on the environment. It uses the economic principles to address the environmental issues that humans cause like pollution of the air, overfishing and global climate change. It also studies the economic benefits and costs of different policies or management options which could be employed to address these issues.
In this field, “negative externalities” are the most significant issue. This is a situation in which market forces create excessive quantities of a particular product or service. If the factory produces paint for example, it can reap the profits, but cause pollution that can be harmful to other people (such sick people).
Economics researchers attempt to address this issue by implementing price mechanisms that compensate for negative externalities and encourage desired behavior. Pigouvian tax is a prime example of a tax designed to discourage polluting industries through increasing the cost of producing pollution. Another example is “cap and trade” regulations, which permit an organization to buy and sell credits that lower its emissions.
A major subject of discussion in this area is the assessment of the economic value of natural resources that do not have an exact price, such as biodiversity or clean water. In the past 30 years various valuation methods commonly referred to as nonmarket value have been developed to assess these resources.
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