The unremitting processes of industrialization and urbanization in the last several decades have disrupted and destabilized the global environment to a degree unprecedented in the history of mankind. Not only have global environmental issues such as global warming, acid rain, the loss of biodiversity, pollution of the oceans, and desertification become real threats to the stability of the environmental equilibrium, but they also tend to impair economic development in many developing countries and to lower the welfare of people in all future generations decisively.

The processes by which global environmental issues have arisen are interwoven with natural, historical, cultural, social, and political factors, but the predominant forces behind them are economic. Any analysis of environmental issues must involve a careful examination of the economic motives behind the activities responsible for the disruption of the natural environment, and any institutional arrangements or policy measures intended to restore environmental equilibrium must take into account the resulting economic impact on human activities.

Global environmental issues have three aspects that have not been satisfactorily addressed by orthodox economic theory until quite recently.

First, all phenomena involved with global environmental issues exhibit externalities of one kind or another. That is, as is typical with the case of global warming, what each individual decides to do is affected by the behavior of other members of the society, and vice versa. The questions of externalities certainly are of great interest to the economist as exemplified by Cecil Pigou's classic work The Economics of Welfare (Pigou 1925) and Paul Samuelson's seminal paper, “The Pure Theory of Public Expenditures” (Samuelson 1954).