Externalities, environmental quality, and allocation

Abstract

Externalities exist since economic activities are linked to each other via nonmarket variables. One important factor explaining the occurrence of negative externalities are competing uses of the environment. - A model is constructed that determines effluent charges as shadow prices for pollutants by explicitly taking into account some of the competing uses of the environment. Specifically, it is assumed that production activities generate pollutants and that a pool of pollutants ambient in environmental media negatively affects productivity. Also, immissions and use intensity influence the quality of environmental public consumption good. Emissions can be abated by an environmental protection agency. Welfare of the society is defined with respect to private goods and environmental quality. The shadow prices for emissions, immissions, pollutants abated and commodities are derived. Possible extensions of the model are discussed.