Production Theory and Transformation Space
In the following four chapters, the static allocation aspect is analyzed. We study production theory, assuming emissions as joint outputs of production and treating environmental quality as a variable in the production set (chapter 3). After defining the production possibilities, we study which prices should be set in order to reach optimal results with respect to a welfare criterion. Also, we analyze whether optimality can be attained in a competitive equilibrium when environmental quality is taken into consideration (chapter 4). In chapter 5, we present the public-goods approach to environmental allocation. Benefit/cost analysis, the Lindahl solution, and institutional mechanisms which reveal individual preferences are discussed. Whereas the public-goods approach starts from the assumption that environmental quality cannot be attributed to individuals, the property-rights discussion stresses the point that the introduction of property rights may solve the allocation problem (chapter 6).
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