Abstract

Ecological economists need to have knowledge of the theory of the firm because damage to ecosystems is largely the result of production processes of firms or due to the consumption of the products that firms choose to supply to their customers. Policies aimed at limiting or overcoming ecosystem damage may fail if firms do not respond to incentives in the ways the policy designers expect. For example, firms may fail to change their behaviour in response to economic incentives (e.g., tax or subsidy) contrary to mainstream economic expectations. If the theory correctly predicts such behaviour it will inspire the search for alternative policies such as direct regulation. A contention of this chapter is that a more realistic understanding of the firm is indeed necessary.