An externality is a cost or benefit that is imposed on a third party as a result of an economic activity. In the context of environmental law, externalities can be positive or negative. For example, a factory that pollutes the air imposes a negative externality on the people who live nearby, while a forest that provides clean air and water provides a positive externality.

The Coase Theorem states that externalities can be eliminated through bargaining between the parties involved, provided that certain conditions are met. These conditions include: (1) the parties have complete information about the costs and benefits of the externality, (2) there are no transaction costs, and (3) the parties are able to negotiate without coercion. If these conditions are met, then the parties will be able to reach an agreement that eliminates the externality.

A property right is a legal right to use or enjoy property. Property rights can be private or public. Private property rights give individuals or organizations the right to use and control their property, while public property rights give the government the right to use and control public property.

Property rights can be used to address environmental problems in a number of ways. By assigning property rights to polluters, they will have an incentive to reduce pollution in order to protect their property value. By assigning property rights to victims of pollution, they will have the legal standing to sue polluters for damages. By assigning property rights to the government, the government can regulate pollution in order to protect public health and the environment.

A market-based instrument is a policy tool that uses market forces to achieve environmental goals. Market-based instruments can be used to discourage pollution, encourage energy efficiency, and promote renewable energy. Some common types of market-based instruments include pollution taxes, emissions trading systems, and renewable energy subsidies.

Market-based instruments can be used to address environmental problems in a number of ways. By creating a financial incentive for polluters to reduce pollution, they can encourage polluters to adopt cleaner technologies and reduce their emissions. By creating a financial incentive for consumers to reduce their consumption of polluting goods, they can reduce the demand for polluting goods and services. By creating a financial incentive for businesses to invest in clean technology, they can encourage businesses to develop and adopt new clean technologies.

Market-based instruments have a number of advantages over traditional command-and-control regulations. They are more efficient because they allow polluters to choose the most cost-effective way to reduce pollution. They are more flexible because they can be adjusted to changing circumstances. They are more cost-effective because they create a financial incentive for polluters to reduce pollution, rather than simply imposing a penalty.

Market-based instruments have a number of disadvantages. They can be complex and difficult to design, as they require careful consideration of a number of factors, such as the level of pollution to be reduced, the costs of pollution reduction, and the potential for windfall profits. They can also be difficult to enforce, as they require monitoring and verification of compliance. Finally, they can create windfall profits for polluters, if the price of pollution permits rises unexpectedly.

Law and economics plays an important role in environmental law. It can help policymakers design effective environmental policies by providing insights into the economic costs and benefits of different policy options. It can help judges interpret environmental laws by providing an economic framework for understanding the intent of the legislature. It can also help businesses comply with environmental laws by providing guidance on how to minimize the costs of compliance.

The field of law and economics of environmental law faces a number of challenges. These challenges include the complexity of environmental problems, the uncertainty of environmental science, and the political nature of environmental policymaking. The complexity of environmental problems makes it difficult to design effective policies. The uncertainty of environmental science makes it difficult to predict the consequences of different policy options. The political nature of environmental policymaking makes it difficult to reach consensus on the best way to address environmental problems.