PUBLIC POLICY AND THE ENVIRONMENT

Our discussions have led to two conclusions:
  • unregulated market behaviour may fail to produce socially efficient outcomes in the presence of externalities;
  • direct bargaining can lead to efficient outcomes, but is unlikely to be feasible where externalities take the form of significant effects on the natural environment.

Can public policy provide a framework within which efficiency gains are achievable? An affirmative answer can be given to this question. In order to achieve efficiency gains, public policy should be directed so that either
  • firms are prohibited from doing things the social costs of which exceed the social benefits, or
  • firms should be given incentives to not do things for which the social costs exceed the social benefits.