Environmental Quality as a Public Good

Abstract

In this chapter we analyze the public-goods approach to the environmental problem. Environmental quality is considered to be a public good that must be consumed in equal amounts by all. This approach starts from the premise that private property rights cannot be defined for environmental quality (or if technically feasible, that private property rights should not be defined). Then the market cannot allocate the environment, and government intervention becomes necessary. How does the government determine the desired environmental quality? One approach is to assume a social-welfare function which allows us to specify the benefits and costs of environmental quality. In a similar way, benefit-cost analysis implicitly presupposes a social-welfare function as a guideline for evaluation. Another approach is to base the evaluation of environmental quality on individual preferences. A Pareto-optimal allocation requires individualized prices of environmental quality to be assessed according to the individual’s willingness to pay. If individuals are not inclined to reveal their true willingness to pay, we have to look into institutional arrangements that may reveal and aggregate individual preferences.