Chapter Twelve:

The Economics of the Environment

The Theory of Externalities

Figure 12.1: The Negative Externalities of T-Shirt Production

Figure 12.2: Internalizing a Negative Externality with a Pigovian Tax

Figure 12.3: Analysis of a Positive Externality

Figure 12.4: Environmental Taxes in Select Developed Countries, as a Percent of Total Tax

Revenue, 2010

Source: Organisation for Economic Co-operation and Development, OECD/EEA database on instruments used for environmental policy and natural resources management. Updated April 13, 2012.

Environmental Policies in Practice

Figure 12.5: A Firm’s Response to a Pollution Tax

Figure 12.6: Gasoline Prices and Consumption, Select Countries, 2010

Sources: GIZ, International Fuel Prices 2010/2011, 7th ed. Federal Ministry for Economic Cooperation and Development (Germany), 2011; U.S. Energy Information Administration online database.

Appendix: Formal Analysis of Negative Externalities

Figure 12.7: Welfare Analysis of a Negative Externality, without a Pigovian Tax

Figure 12.8: Welfare Analysis of a Negative Externality, with a Pigovian Tax