ABSTRACT

While it is true that for a range o f agency objec tiv e fun ctions each p o licy m aker’s first ranked policy is not the social first rank when implemented in isolation, they combine here to attain the first-best. From table 2, it can be seen that i f the environmental regulator selects the Pigouvian tax and the water policy maker selects a water price o f w \ the result is a welfare loss o f zero; the first-best solution is attained. More importantly, this result is encouraging because it illustrates that, in this case, the social optimum can be attained without coordination. One regulator need not have information nor expectations regarding the behavior o f the other, and need not even recognize that they are setting policy under second-best conditions. This result is particular to the distortions examined here and results from the complementary nature o f the agricultural and environmental

policies examined.9