Our aim in this book is to provide a comprehensive treatment of graduate level environmental economics in a single volume, using a style of presentation that integrates the many sub-areas of inquiry that have come to define the field. To this end we begin in this chapter by introducing the field of environmental economics via its roots in neoclassical welfare theory and the theory of externalities. Environmental problems and policy challenges stem, of course, from human uses of the environment and natural resources. This statement alone does not provide the basis for our study, however. Rather, it is the way that humans use the environment and the impact this use has on the well-being of others that interests us and defines the field. Our starting point therefore is the notion that one person's interactions with the environment can have direct and unsolicited effects on another person, without compensation or other recognition of the impact. To use the classic example, a factory owner whose plant sits next to a laundry impacts the launderer by dirtying the air he needs to produce clean linen. The launderer suffers as a result of the actions of the factory owner, without recourse or compensation. A contemporary example involves the leaching of nitrogen fertilizer from agricultural fields into underground aquifers, from which surrounding communities draw drinking water. Users of groundwater for drinking suffer due to the actions of the farmer, again without recourse or compensation.

These two examples serve to illustrate the types of problems considered in environmental economics and hint at both the positive (describing what is) and normative (describing what ought to be) aspects of study. From a positive point of view, we might be interested in understanding how existing institutional structures lead the self-interested factory owner and farmer to undertake actions that have negative consequences for others. From a normative perspective, we might be interested in suggesting policy interventions that help mitigate these consequences. In either case we are dealing with a potential misallocation of resources that affects the level of well-being that members of society can obtain. It is in this sense that environmental economics falls under the rubric of welfare economics and the theory of externalities, dealing specifically with the failure of market economies to properly account for the environmental ramifications of economic activity.