Every time you drive to work or school in your car, you add to the traffic on the road and cause a little damage to the pavement. As thousands of others in your hometown do the same every day of the year, the damage accumulates and the road will inevitably need to be repaired and, perhaps, widened. In the previous section, we brought up the concept of economic externalities, which are the costs or benefits to society or the environment not included in the price of a product or activity. In this case, road damage is an externality associated with driving motor vehicles on roads maintained at public expense. Government regulations exist to prevent such market failures and take several forms.

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The most obvious solution to preventing harm to society is through command-and-control regulation, which is direct regulation of an industry or activity, indicating what is and is not allowed, along with a schedule of penalties for breaking the rules. One way to prevent damage to the road is to legislate what type of tires are allowed on vehicles. For instance, towns in cold areas frequently prohibit snow chains within their limits because they tear up the road. In the city of São Paulo, Brazil, planners reduce traffic by regulating which cars can be on the road on any given day based on their license plate number.

In Chapter 1, we introduced the discovery that CFCs (chlorofluorocarbons) were causing an ozone hole over the Antarctic. Companies that produced CFCs were profiting as they harmed the environment—and they had no interest in voluntarily ending production. In fact, they spent millions on public relations campaigns and lobbying efforts to resist attempts to limit the production and use of CFCs; but once alternative chemicals were developed, they became supportive. In 1978 the United States instituted the first ban on CFCs, eliminating their use as propellants in aerosol spray cans. The Montreal Protocol, signed in 1987, would eventually lead to the phasing out of CFCs in all products.

The success of such command-and-control regulations depends on enforcement of the rules, which includes the government’s ability to catch violators and the level of fine or other punishment required to discourage rule-breaking. If a penalty is too low or the chance of getting caught is unlikely, then businesses will consider breaking the rules. Penalties for illegally importing CFCs into the United States today can include prison time.

Command-and-control instruments are not suited to preventing all environmental damage, just as they aren’t ideal for preventing routine damage to a highly trafficked road. After all, the economy depends on people using the roads. Nevertheless, this raises the question of who should foot the bill for such repairs. Should everyone in town contribute an equal amount? Should car companies pay for the roads? What about truck drivers whose vehicles cause even more damage? And what about people who choose to walk or bike and have less of an impact on the roadways? Should they really be paying the same amount?

In 1920 an economist named Arthur C. Pigou became the first to propose taxing economic externalities, such as the damage caused by driving. His ideas caught on, and today we pay for roads in the United States through vehicle registration fees and taxes on fuel, which generally correlate with the number of miles a person drives. Since 2003 the city of London has charged a 10-pound “congestion charge” for every vehicle entering the city center on weekdays. So-called Pigovian taxes, or “sin taxes,” are also placed on cigarettes and alcohol to discourage their use due to the harm they cause to society.

These taxes also contribute to the field of study called environmental economics, which includes the environment in its models. In its analyses, environmental economics draws mainly from the field of economics in its assessments and management of costs and benefits of economic impacts on the environment. For example, the way that environmental economists control damage to the environment by economic externalities, such as pollution, is to put a tax on the externality proportional to its damage to the environment. For instance, Pigovian taxes have been proposed for the emission of carbon dioxide and other pollutants in the atmosphere, where an outright ban is impractical. Pigou also thought that economic activities that benefit the environment should be encouraged through government subsidies. As with command-and-control regulations, one of the challenges with this strategy is determining the right level of Pigovian tax or subsidy.

For economists, money is the fundamental metric of value. But even when they have tried to incorporate externalities into their economic models, some ecologists believe that they still undervalue natural capital, which is all of Earth’s natural assets, including plants and animals, minerals and soils, and air and water. In contrast to environmental economics, the field of ecological economics draws from many disciplines, including economics, in its studies of the relationships between economic activity and its impact on natural capital. Whereas conventional economics has seen people and their institutions as nearly alone in the world, and traditional ecology has focused most of its studies on ecosystems occupied by species other than humans, ecological economics attempts to build a conceptual bridge between humans and human institutions and the rest of nature (Figure 2.22).

Rather than seeking only to maximize financial capital through short-term economic productivity, ecological economists are focused on sustaining natural capital, which provides humans with a flow of goods and services. A healthy fish stock will replenish itself each year, providing food to humans indefinitely. A forested valley will provide clean water. And a pristine beach may simply be pleasant to walk on, which has social or cultural value. All these things have value and one of the central challenges of ecological economics is determining how much they are worth to society now and in the future. Knowing these values can help us make smart, sustainable economic decisions. Ecological economists who have placed a monetary value on such natural goods and services, called ecosystem services, have found that they far exceed the value of all goods and services produced by the world’s economic systems. We will discuss ecosystem services in detail in Chapter 4.

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