To what extent are environmental problems economic problems? And if so, how can economic instruments be used to tackle these problems? To answer this, one must understand the nature of an economic problem.

An economic problem is one that has the characteristic of scarcity, and because of it, one has to make choices. Such choices involve trade-offs. These, in turn, depend on what the opportunity costs or, conversely, the foregone gains in making, or not making, a choice are.