The Quasi-Optimal Price of Undepletable Externalities

Abstract

This paper extends the Baumol-Oates result which proves that a fee (subsidy) which achieves a given level of an undepletable externality (pure public good), does so at a minimum cost to society. The extension proves that such a fee (subsidy) is also a quasi-optimal Pareto solution for a competitive economy. Any estimate of the initial fee (subsidy) should be evaluated through a benefit-cost approach rather than through the minimum cost approach which requires the assumption of fixed inputs. In addition, it is shown that no knowledge of the marginal utilities of the externalities (public good) to consumers is necessary to evaluate the quasi-(Pareto) optimal solution.