Environmental economics is a relatively new field, but its roots go back to the end of the nineteenth century when economists first discussed the problem of externality. Economic transactions have external effects which are not captured by the price system. Prime examples of these externalities are air pollution and water pollution. The absence of a price for nature's capacity to absorb wastes has an obvious solution in economic theory. Economists advocate the use of surrogate prices in the form of pollution taxes and discharge fees. The non-priced aspect of the transaction then has a price, which sends a signal to the producers to economize on the use of the resource.

In addition to the theory of externalities, economists have recognized that certain goods, such as those provided by nature, are common property. Lacking a discrete owner, they are likely to be over-utilized. Ultimately, they will be...