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The environment is both a biological and physical source of all natural resources. Some natural resources are renewable (e.g., water, biological resources) while others are non renewable (e.g., geological deposits). The major environmental problems we face today are pollution, depletion of nonrenewable resources and degradation of renewable resources. Since all production involve pollution in one form or another, pollution is likely to be with us in some form or another. No production activity is one hundred percent perfect in terms of technology and hence even with zero population growth; some pollution will always be generated. 

Most economic activities involve transformation of resources from their original locations and natural forms to locations where they are used as final products. These transformation processes also generate wastes (pollution) at different stages and often the environment is used as a repository for waste products. When waste deposited in the environment exceed the assimilative capacity of the environment, degradation of environmental resources take place. Degradation of the environment affects public health, physical health, physical assets, plants, animals and scenic beauty, etc. 

The environmental costs occur in the forms of (a) larger expenditure on health care, provision of protected water supply and maintenance of assets, 
(b) an increase in the application of resources to achieve a given basket of output over time in order to compensate for the decline in the quality of resources, (c) abatement expenditures incurred by producers, (d) defensive expenditures incurred by consumers and (e) administrative expenses. 

As the potential human impact on the Planet increases with the expanding population seeking a higher material standard of living the impact will become an actual impact in the absence of policy to prevent it. Hence what is required is a package of policy measures to identify and monitor pollutant (negative externalities), to identify their economic, ecological and sociological effects and to internalize their effects within levels, which are not only safe for survival but also fully appropriate to the quality of life expected. 
Economists view pollution as negative externalities. Pigou attributes environmental pollution to divergence between social marginal cost and private marginal cost. Coase attributes the negative externality to absence of well-defined property rights on environmental resources and high transaction costs in finding solutions via bargaining between polluters and pollutees. 

Experiences in environmental policy making during the last three decades in both developed and developing countries reveal that countries must choose an enabling legal and administrative system and a mechanism for enforcement of environmental policies. The available policy options range from Command and Control (CAC) instruments to Market based instruments (MBI). Though the actual mix of policy instruments varies from country to country depending on its goals, stage of development, institutional capabilities and political preferences, there has been a gradual shift in favour of Market based instruments. The reason for the shift being (1) the alleged superiority of MBIís in achieving environmental goals at lesser cost compared with CAC instruments (2) enormous information requirement for the design and enforcement of CAC instruments (3) demise of central planning and (4) adoption of outward-oriented policies by many developing countries to reap the benefits of globalization.


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