Public, Private and Environmental Goods

The basic general equilibrium model of resource allocation is extended to take environmental goods and externalities into account. The conditions for social welfare maximization and Pareto optimality are derived and compared with the characterization of competitive market equilibrium. The optimality conditions are then used to characterize optimal environmental taxes under the simplifying assumption that there are no other distortions in the economy. The analytical framework is generalized to take account of uncertainty and resource allocation over time, and includes discussions of attitudes to risk and time discounting.