This book studies collective action via non-governmental institutions to address environmental problems. Individually rational behavior can sometimes produce outcomes that are harmful to society as a whole. While people can seek to design institutions to structure collective action in more desirable ways, there is no guarantee that these institutions will always succeed in harmonizing individual goals with social outcomes. This challenge is particularly severe in the environmental policy area. Looking to increase profits, a firm may emit toxic pollutants into the atmosphere, causing harm to its neighbors. While the firm's profits may increase, from a broader perspective, the harm to the society caused by its emissions all too often outweighs the higher profits the firm enjoys. How can the firm be persuaded to take into account the costs it has imposed on others and reduce its pollution emissions? During the twentieth century, governments have sought to mitigate pollution's harms through command and control regulations that set standards for firms' environmental performance, prescribe pollution-control technologies firms must adopt, monitor whether firms are adhering to governmental prescriptions, and sanction those that do not. The assumption is that without detailed orders from the government, backed by coercive enforcement, firms are likely to sacrifice a cleaner environment for their own profits.
Many question whether such government regulation is a panacea for solving pollution problems (Coase, 1960; Ostrom, 1990). After all, governments themselves are sometimes apt to fail (Wolf, 1979), clearing the way for unscrupulous firms to pollute at the public's expense.