In this lecture on topics in environmental economics, Dr. Sheila Olmstead presents a summary of the use of market-based approaches to dealing with environmental externalities. She first notes the difference between prescriptive regulations, which generally take the form of laws and policy standards, and market-based regulations, which can use price or quantity instruments like taxes or allocation permits to create new markets that capture the cost of externalities. She presents an analytical example of cap-and-trade approaches to highlight the difference between market-based policies and prescriptive policies. She notes the cost-effectiveness of market-based policies in many scenarios and also identifies cases in which prescriptive policies might be more appropriate. She ends with several examples of market-based approaches to environmental policy and their relative costs and benefits.

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