By Peter Bohm
ISBN-10: 0333441354
ISBN-13: 9780333441350
ISBN-10: 1349187860
ISBN-13: 9781349187867
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Extra resources for Social Efficiency: A Concise Introduction to Welfare Economics
Example text
Let us now introduce the concept of a market economy with many producers and consumers in the intertemporal context. Each consumer is assumed to be able to save at a certain market rate of interest (r). 13. If the consumer now tries to attain his highest indifference curve, we end up in a position where the marginal rate of substitution equals the slope of the budget line; hence, the marginal rate of substitution will be the same for all consumers (who save). 13 MRSi\MRSi\ Xt(l) goods up to the point where the marginal rate of transformation is made equal to 1 + r, that is up to the point where the rate of return on marginal investments coincides with r.
In cases such as these, it may be that the polluter should be compensated for the cost of adjustment he was forced to make on efficiency grounds. One way to do this is to subsidise the polluter so that he reduces output from q 1 to q 0 . In fact, a subsidy in the amount of a per unit of output reduction starting from q 1 has essentially the same short-term effect as a fee in the amount of a per unit of output. From an analytical point of view, the subsidy can be seen as a particular version of the fee solution, since increasing output from the preferred level q 0 would lead to a lower total amount of subsidies, and hence, to a cost for the polluter.
The conclusion is that given the costs for connection the purification costs must be lower than a certain value, possibly far below the fee a, if purification is to be preferred from society's viewpoint. This example illustrates how it may be socially warranted to reduce pollution, but not eliminate it. In practice, politicians have preferred physical regulations to emission charges as instruments to combat environmental degradation. A major reason for this is that the result of applying the regulation approach is relatively foreseeable, especially when regulation can be tied to releases of pollutants and when such releases are easy to monitor.
Social Efficiency: A Concise Introduction to Welfare Economics by Peter Bohm
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