Environmental Policy - Rationale

Rationale

The rationale for governmental involvement in the environment is market failure in the form of externalities, including the free rider problem and the tragedy of the commons. An example of an externality is a factory that engages in water pollution in a river. The cost of such action is paid by society-at-large, when they must clean the water before drinking it and is external to the costs of the factory. The free rider problem is when the private marginal cost of taking action to protect the environment is greater than the private marginal benefit, but the social marginal cost is less than the social marginal benefit. The tragedy of the commons is the problem that, because no one person owns the commons, each individual has an incentive to utilize common resources as much as possible. Without governmental involvement, the commons is overused. Examples of tragedies of the common are overfishing and overgrazing.