Abstract:

When economists consider policy questions relating to the environment they draw upon the basic results of welfare economics. The purpose of this paper is to consider those results from welfare economics that are most relevant to environmental policy problems, like resource allocation. In this respect, we consider how an efficient allocation would be brought about in a market economy characterised by particular institutions. Hence, in this paper, we have not defined and explained the terms ‘efficiency’ and ‘optimality’ as they are used in welfare economics, but we have demonstrated that a perfectly functioning ‘ideal’ market economy would bring about an efficient outcome, but not necessarily an optimal one.