Linking Pollution and Macroeconomic Variables: An Indonesian Example

Increasingly, environmental issues have become an integral part of economic planning and decision-making in many countries. The consensus seems to suggest that the solution approach would be to internalize the externalities, since many of the environment-cum-economic issues involve problems of externalities. There seems to be little disputes about the need to apply monetary prices for environmental resources, for example, air, river water and so on, which, as often practised, have always been exploited without real monetary costs (market imperfection). Another case often found is the failure to assign some prices or costs on pollution, which is frequently considered a ‘bad’ outputs. Even if costs are incurred, more often than not these are far below the optimal level, creating a divergence between private and social returns.