Econ

NATURAL RESOURCE AND ENVIRONMENTAL ECONOMICS (3rd Edition)
Perman, Ma, McGilvray and Common


SUGGESTED ANSWERS




Answers to Questions in Chapter 6

Discussion questions

1 ‘Only the highest standards of environmental purity will do.’ Discuss.
The opinion expressed here is not regarded by economists as being valid in general. It suggests that resources should be devoted without limit to cleaning up (or preventing) environmental pollution or degradation, irrespective of the magnitude of the benefits that this would bring. Economic efficiency requires a balancing of benefits and costs at the margin. However, the statement would be consistent with economic efficiency if clean up/prevention costs were always zero, or damages were always infinitely large, or more generally if long run marginal benefits of abatement were greater than the long run marginal costs of abatement over all levels of abatement up to the point where pollution is entirely eliminated.

2 ‘A clean environment is a public good whose benefits cannot be privately appropriated. Therefore private industry which is run for private gain will always be the enemy of a clean environment.’ Examine this proposition.
We just provide a few points for an answer here. If a public good possesses the characteristics of being both non-rivalrous and non-excludable (so that it is a pure public good, see textbook section 5.9 page 126) then markets cannot provide them in the amounts that go with allocative efficiency (page 131). This suggests that if a clean environment is a pure public good it will be underprovided by a market economy with supply decisions taken by profit-maximising firms. Indeed, consideration of the free-rider problem suggests that there may be gross under-provision.
However, it is not clear that ‘a clean environment’ is properly described as a pure public good. Nor is it impossible to imagine that schemes could be devised – albeit imperfect ones – whereby private firms are...