Chapter 8. The Political Economy of Environmental Policy This chapter provides a review and assessment of the extensive literature on the political determination of environmental regulation. A promising theoretical literature has emerged relatively recently that provides models of the political interaction of government with various interest groups in the setting of environmental standards and the choice of regulatory instruments. A large empirical literature supports such models finding evidence of the influence of interest groups but also evidence that net social benefits are often an important determinant of environmental policy choices. A later section of the paper takes up the issue of environmental federalism and the large and growing theoretical literature that addresses the so called competitive “race to the bottom” as various jurisdictions attempt to use environmental policy as an instrument of economic competition. The evidence on all this is sparse although some recent work in the U.S. is unable to find any support for the race to the bottom hypothesis. The paper concludes with a brief look at the evolution of environmental policy and finds that economics has come to play a growing role both in the setting of standards for environmental quality and in the design of regulatory measures. There seems to be a discernible trend toward more efficient decision making for environmental protection.