This article provides an overview of the economics of environmental policy, including the setting of goals and targets, notably the Kaldor-Hicks criterion and the related method of assessment known as benefit-cost analysis. Also reviewed are the means of environmental policy, that is, the choice of specific policy instruments, featuring an examination of potential criteria for assessing alternative instruments, with focus on cost-effectiveness. The theoretical foundations and experiential highlights of individual instruments are reviewed, including conventional command-and-control mechanisms and market-based instruments.
This article draws, in part, on Revesz and Stavins (2005). Helpful comments on a previous version were provided by Lori Bennear and Nathaniel Keohane. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.