Review of Environmental Economics and Policy Advance Access originally published online on February 27, 2008
Review of Environmental Economics and Policy 2008 2(1):26-44; doi:10.1093/reep/rem027
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On Behavioral-Environmental Economics
* Shogren is the Stroock Professor of Natural Resource Conservation and Management, Department of Economics and Finance, University of Wyoming, and the King Carl XVI Gustaf Professor of Environmental Sciences, Umeå University. E-mail: JRamses{at}uwyo.edu.
** Taylor is Professor, Department of Agricultural and Resource Economics, and Director, Center for Environmental and Resource Economic Policy, North Carolina State University.
Traditional environmental and resource economics uses rational choice theory to guide the evaluation of alternative policy options to correct market failure. Behavioral economics, however, has challenged this conventional mindset by showing how people frequently make choices and state values that deviate from the presumption of rationality, i.e., behavioral failures. This article explores the potential of behavioral economics to advance the science of environmental and resource economics. We address four questions: (1) How can behavioral failures affect thinking about environmental policy? (2) When are behavioral failures relevant to the science of environmental economics? (3) Is behavioral failure just another form of market failure? (4) Do we have a new behavioral-environmental second best problem? We conclude that the evidence from behavioral economics remains insufficient to support the wholesale rejection of rational choice theory within environmental and resource economics. But this does not mean anomalous behavior is non-existent; nature's goods and services frequently lack the active market-like arbitrage needed to encourage consistent and rational choice. We believe it is crucial to identify the economic circumstances, institutional designs, and social contexts in which rational choice theory works and those where it fails to capture observed behavior.
JEL Classification: Q5, C9
Shogren thanks the Norwegian University of Life Sciences, GREQAM, and the University of Paris I-Sorbonne for their hospitality. This review draws from many discussions over the years with our colleagues: thanks to T. Cherry, T. Crocker, P. Ferraro, G. Hollard, T. Hurley, D. Hayes, G. Harrison, N. Hanley, B. Kriström, S. Kroll, S. Luchini, G. Parkhurst, C. Plott, E. Romstad, V. K. Smith, and V. L. Smith.
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