Introduction and Classification

Controlling transnational pollution and managing international environmental resources requires negotiating agreements among two or more countries. The obstacles are formidable. There is no supranational authority to compel participation. International law and international property rights are weak, unsettled, or absent. An equitable distribution of the costs and benefits appears necessary, so that equity and efficiency must be simultaneously considered. At the same time, the instruments for international compensation are rudimentary, and the conditions for developing Coase-like markets are limited. Free-riding behavior is likely. Many of the more pressing issues involve scientific uncertainty and time lags, and many resist monetary valuation.

Section 2 starts with three simplified theoretical examples of reaching agreement on transnational externalities. The analytical foundations include the provision of public goods and, because of strategic interactions, game theory. Although the theoretical conclusions from simple models appear discouraging, some policy responses are feasible and welfare-improving, and these are discussed in Section 3. Section 4 tempers the abstract and theoretical discussion by examining eight specific cases or approaches to managing international externalities. The appendix to the chapter presents stylized examples of negotiations to underscore the sensitivity of the outcomes to the context and behavioral assumptions. Before getting started, however, it is useful to introduce a classification system.

International environmental externalities may be classified along three dimensions to aid analytical work. The first is to distinguish between unidirectional and reciprocal externalities.