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Environmental Economics Cheat Sheet

The core ideas of Environmental Economics distilled into a single, scannable reference — perfect for review or quick lookup.

PiqCue — piqcue.com/environmental-economics/cheatsheet

Quick Reference

Externalities

Costs or benefits of an economic activity that affect third parties who are not directly involved in the transaction. Negative externalities like pollution impose costs on society that are not reflected in market prices, leading to overproduction of harmful goods.

Pigouvian Tax

A tax levied on activities that generate negative externalities, set equal to the marginal external cost at the socially optimal level of output. Named after economist Arthur Pigou, it aims to internalize the external cost so that market prices reflect the true social cost.

Cap-and-Trade

A market-based regulatory system in which a government sets a cap on total emissions and issues tradable permits. Firms that reduce emissions cheaply can sell surplus permits to firms facing higher abatement costs, achieving the target at the lowest total cost.

Tragedy of the Commons

The situation in which individuals acting in their own self-interest deplete or degrade a shared resource, even though it is in no one's long-term interest for this to happen. It arises when property rights are absent or poorly defined.

Coase Theorem

The proposition that if property rights are well-defined and transaction costs are negligible, private bargaining between parties will lead to an efficient allocation of resources regardless of the initial assignment of property rights. In practice, high transaction costs often prevent this outcome.

Ecosystem Services Valuation

The process of estimating the economic value of benefits that natural ecosystems provide to humans, including provisioning services (food, water), regulating services (climate, flood control), cultural services (recreation), and supporting services (nutrient cycling).

Social Cost of Carbon

An estimate of the economic damage caused by emitting one additional ton of carbon dioxide into the atmosphere, expressed in dollars. It is used in cost-benefit analysis to evaluate climate policies and regulations.

Discount Rate in Environmental Policy

The rate used to convert future environmental costs and benefits into present values. A higher discount rate places less weight on future damages, which is controversial in climate economics because the worst damages are decades or centuries away.

Contingent Valuation

A survey-based method for estimating the economic value of non-market goods and services by asking people how much they would be willing to pay for a specific environmental benefit or how much they would accept to tolerate a loss.

Green GDP

An alternative measure of national output that adjusts traditional GDP by subtracting the costs of environmental degradation and natural resource depletion. It aims to provide a more accurate picture of sustainable economic welfare.

Key Terms at a Glance

Abatement:The reduction or elimination of pollution or environmental damage, often measured in terms of cost per unit reduced.
Cap-and-Trade:A market-based regulatory system that caps total emissions and allows firms to buy and sell emission permits.
Carbon Footprint:The total amount of greenhouse gases emitted directly and indirectly by an individual, organization, event, or product.
Carbon Tax:A tax levied on the carbon content of fuels or on CO2 emissions, designed to reduce greenhouse gas output.
Coase Theorem:The proposition that well-defined property rights and low transaction costs allow private parties to resolve externalities efficiently.
Command-and-Control:Regulatory approach that directly prescribes environmental standards or technologies rather than using market incentives.
Common-Pool Resource:A resource that is rivalrous but non-excludable, making it susceptible to overuse, such as fisheries or groundwater.
Contingent Valuation:A survey-based technique for estimating the economic value of non-market environmental goods and services.
Cost-Benefit Analysis:A systematic method of comparing the costs and benefits of a policy or project, typically expressed in monetary terms.
Discount Rate:The rate used to convert future costs and benefits into present values for economic comparison.
Ecosystem Services:The benefits that humans derive from natural ecosystems, including clean water, pollination, climate regulation, and recreation.
Emission Permit:A government-issued authorization allowing the holder to emit a specified quantity of a pollutant.
Externality:A cost or benefit that affects a party who did not choose to incur that cost or benefit through a market transaction.
Free-Rider Problem:The tendency for individuals to benefit from a shared resource or public good without contributing to its provision.
Green GDP:A measure of economic output adjusted to account for environmental degradation and natural resource depletion.

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Environmental Economics Cheat Sheet - Quick Reference Guide | PiqCue