Theory of Environmental Policy
The neoclassical economics mainly deals with efficient allocation of resources through market mechanism. In the production process, in addition to the private (or public) good, public 'bad' also emerges in the form of solid, liquid, gas or noise pollution. For example, when production of cement takes place, there is emission of dust and harmful chemicals into the atmosphere. Neoclassical theory with its emphasis on market mechanism takes care of the production of cement (in this case) but ignores the management (production, pricing, control) of air pollution arising out of cement production. Public bad is produced not only during production activities but also in the course of consumption. For example, when we consume packaged food, we throw away the polythene cover (which is not biodegradable) here and there as a result of which land pollution takes place. The management of public bads is beyond the scope of the neoclassical analysis and therefore is usually ignored.
The main reason behind environmental problem is 'market failure'. Market failure in the case of environmental problems arise mainly due to lack of
i) Well defined property rights
ii) Proper valuation of 'public bad'
The problem of property rights will be further dealt with the management of common property resources (CPR). In the present Unit we concentrate on the issue of the divergence between social and private costs and the methods available in the literature to internalize the externalities, that is, development of mechanism through which the social cost of pollution will be borne by the polluters.