Among the factors contributing to the difficulty in resolving conflicts between environmental and economic interest are the dynamics of perception and decision making studied by social psychologists. We identify social psychological dynamics that impede parties in environmental dilemmas from understanding facts, understanding interests, and making decisions in favor of efficient conflict settlement. We review research elucidating the sources of these problems and potential remedies. Then we discuss how these dynamics play out within the context of procedures typically used to settle environmental conflicts, traditional legislated regulation and alternative market-based procedures. We conclude that whereas market-based alternatives avoid some of the obstacles most endemic to legislation, they exacerbate other problems. We conclude by analyzing emerging hybrid procedures that avoid the largest obstacles associated with purely legislative and purely market-based procedures.