From Figure 1.1 it is clear that the marginal utility cost of pollution for each person at the optimum is:

Figure 1.1

(a) Consider a proposal to use the revenue from the Pigouvian tax to compensate people for damages. In particular, each person i would receive p_e=MUCi_E for each unit of E. How does this affect the efficiency of the outcome in the regulated, competitive economy examined in the chapter?

(b) What if there are defensive possibilities, as considered in exercise 1.1? Specifically, each person would be compensated according to P_e ε(E,d_i), where p_e in this case is a fixed per unit value. Can we draw general conclusions from this about the wisdom of compensating victims of externalities at the margin?

Data from exercise 1.1

Our model of pollution in this chapter assumed that emissions are a pure private bad, and that people have no ability to protect themselves from the adverse consequences of exposure. In reality, individuals can often take private action to mitigate the effective level of pollution. For example, one can stay inside during high ground-level ozone alerts. Consider a generalization of our model in which effective emissions are ε(E, d_i), where ∂ε(Ed_i)/∂E> 0 and d_i is the amount of time person i devotes to defensive action, such that  ∂ε(E, d_i)/∂d_i U_i [X_i, z_i ε, (E,d_i)], and the labor constraint in the economy is l=l_x+l_z+d₁+d₂. The production side of the economy is unchanged.

Transcribed Image Text:

MUCIE =-Px JU, JE au/ax E=E*