Introduction

Governments have always shown a propensity to intervene in economic activities, sometimes with good cause, sometimes not. In the past, their interventions have often been regarded as only their own concerns, and not matters for concern by other countries. Globalization of the world economy, however, has made that kind of independence increasingly problematic. On the one hand, the problems that governments seek to address with their interventions themselves increasingly cross national boundaries. And on the other, the interdependence of world markets itself often means that interventions by governments in their own economies will spill over into others, through trade and other forms of international interaction. For both of these reasons, it is becoming increasingly important to examine the interrelationships among government policies in the international setting. In some cases, these interrelationships will lead to conflict among government policies and the need for some international mechanism to resolve that conflict. In other cases, the lack of international coordination among policies may permit individual countries to free-ride on the policies of others and thus prevent optimal solutions to the world's problems from being attained. This chapter will explore both of these issues, in the particular context of a simple problem in environmental policy, and using the tools of simple economic theory.

Environmental policy provides excellent examples of both of the problems that can arise in international policy conflict and coordination. Consider the issue of environmental pollution by producing firms.