In Part I of the book, we present three chapters that set the stage for our detailed study of the field. Our first objective is to discuss the intellectual and policy roots of environmental economics. In Chapter 1, we review several key results from welfare economics, which provide the normative criteria that we will use to distinguish different market and policy-influenced outcomes. We also review the basic theory of public goods and externalities, which provides the basis for the design and evaluation of environmental policy. In Chapter 2, we turn to a discussion of how environmental policy evolved out of the environmental movements of the 1960s, and how policy needs were, and continue to be, important drivers of research in the field. With this as motivation, we review several different environmental problems and policy initiatives, and discuss the multidisciplinary aspects of work in environmental economics. Finally, in Chapter 3, we describe our baseline model of environmental costs and benefits, which we use to introduce concepts and notation, define a suite of policy options, and establish the evaluation criteria that we will use in later chapters.

Part I of the book also introduces the contributions to the field of two influential thinkers. Arthur Cecil Pigou was a British economist who, working in the early twentieth century, explored market failures through externalities, and made suggestions on policy interventions. An environmental tax is often referred to as a Pigouvian tax in recognition of his work. Likewise, an environmental policy that seeks to balance marginal benefits from reducing pollution with the marginal costs of abatement, is often referred to as the Pigouvian paradigm. More generally, the Pigouvian paradigm is associated with an interventionist approach to solving environmental problems. This is in contrast to the Coasian paradigm, which is named after the University of Chicago economist Ronald Coase. In an influential paper, Coase (1960) argued that externality problems, of which environmental problems are one example, arise from an incomplete definition of property rights. He suggested that if property rights were clearly defined, private negotiations would lead individuals to the correct outcome, without the need for intervention. Given this, the Coasian paradigm is associated with a non-interventionist approach to solving environmental problems.