This paper shows three potential sources of failure from the viewpoint of economic efficiency: (1) environmental negotiation may lead to the wrong amount (either excessive or inadequate) of environmental safeguarding, (2) environmental negotiation may fail to produce agreement for desirable projects, and (3) it may produce agreements for undesirable ones. Industrial/environmental disputes can be categorized in terms of four features. First, the dispute may involve a new development with external environmental costs or an attempt to prevent an already operative project from continuing to generate its traditional environmental impacts. Second, the negotiation may involve transfer payments (the establishment of environmental safeguards) between the parties. Third, the environmental damage that the development project will generate may be related to the extent of the environmental safeguarding in convex fashion (drastic initial damage reduction but decreasing returns). Finally, the amount of safeguarding and side payments a court would impose on the industrialist may vary. The paper examines a situation in which (1) a new industrial project is proposed, (2) no side payments can enter the negotiation, (3) the environmental damage/safeguards relation is convex, and (4) if the dispute goes to court, the industrialist will either proceed without safeguards or the project will be stopped. These attributes are varied, revealing how the change affects the potential for and efficiency of a negotiated solution. Results suggest that environmental negotiation conducted under the threat of a court battle will not produce a socially desirable outcome. Three case studies are presented, two of which are analyzed using mathematical relationships developed within the text. Twenty references, 67 footnotes, and 10 figures are included.