On Behavioral-Environmental Economics

Traditional environmental and resource economics uses rational choice theory to guide theevaluation of alternative policy options to correct market failure. Behavioral economics,however, has challenged this conventional mindset by showing how people frequently makechoices and state values that deviate from the presumption of rationality, i.e., behavioralfailures. This article explores the potential of behavioral economics to advance the science ofenvironmental and resource economics. We address four questions: (1) How can behavioralfailures affect thinking about environmental policy? (2) When are behavioral failures relevantto the science of environmental economics? (3) Is behavioral failure just another form of marketfailure? (4) Do we have a new behavioral-environmental second best problem? We concludethat the evidence from behavioral economics remains insufficient to support the wholesalerejection of rational choice theory within environmental and resource economics. But thisdoes not mean anomalous behavior is non-existent; nature’s goods and services frequentlylack the active market-like arbitrage needed to encourage consistent and rational choice. Webelieve it is crucial to identify the economic circumstances, institutional designs, and socialcontexts in which rational choice theory works and those where it fails to capture observedbehavior. (JEL: Q5, C9)