This article develops a “transaction cost” framework for the analysis of environmental policy, and uses it to organize a discussion of recent literature on policy design and evaluation. We also consider the implications of this framework for optimal environmental policy-making and benefit-cost analysis. The conceptual orientation motivating the work is influenced by the neoinstitutional economics perspective developed by Eggertsson (1990), and others, which itself is influenced by the fundamental work of Coase (1937, 1960).

This transaction cost framework will emphasize the costs of establishing the rights to use environmental resources and the costs of the ex post monitoring and enforcement of those rights...